There still seems to be a great deal of confusion about the logic I've outlined for the economy, monetary policy, interest and mortgage rates, and what they all portend for the prospects of the first-time-homebuyer market and the builders that focus on it.
I'll address the issue one more time here and then wait to see how the trends I've written about progress over the next few months before reviewing again.
The overall gist of the past several columns has been very simple. There is a convergence of issues forming that should be very positive for the near-term prospects, the next 12 months, for first-time homebuyers and for the builders of homes for them.
The two builders I've focused on are Hovnanian Enterprises (HOV) and Beazer Homes (BZH) because they are being priced as though there will never be a resurgence of buying interest for homes by younger adults.
Since the 2008 financial crisis, that has been the case and I've written about it at the end of each calendar year, ahead of the following spring/summer housing season.
There's not been a strong spring/summer housing season for a decade and the stocks of these builders in particular, because of their focus on building homes for first-time buyers, are being priced as though that is a permanent situation.
If the trends I've written about in the previous columns continue, and I think they will, that will likely change for the 2017 spring/summer housing season.
If it does, these stocks will likely surge by several hundred percent between now and the end of 2017. This is simply a heads up for investors to be mindful of these trends and aware of the implications for these stocks.
I've not taken a position in them yet but anticipate doing so within the next few months if the trends continue, in anticipation of the spring/summer housing season.
The timing of such will also be greatly determined by the FOMC's management of monetary policy, which I will address momentarily.
I am not saying that if the process I've outlined plays out and there is a resurgence in first-time homebuyer activity that it will become the catalyst for a secular return to economic growth.
This is merely an opportunity to be aware of an upside surprise for these stocks, and if that occurs I'll consider at that time whether to hold or sell based on the economic environment.
These are both large, well-established builders and they both survived the fallout from the S&L debacle of the late 1980s and early '90s.
That environment in many respects was far worse for the builders than the aftermath of the most recent housing correction. In that environment, development capital was nonexistent. In this environment, the concern is the lack of end buyers for the product.
Although the stock prices are about twice the post-Lehman crisis lows, they are about half the post-S&L debacle lows. At this point, it is simply a waiting game on the return of buyers.
The last issue I'll address here is the Fed and monetary policy.
As I've written about in several columns this year, the Fed is in a tight spot with respect to monetary policy.
If the Fed follows it economic model, then it will have to raise rates soon. If that occurs, I'm of the opinion that long-end U.S. Treasury yields will decrease even more quickly, accelerating the process of falling mortgage rates and attracting homebuyers into the market.
This would also cause the Fed to have to reverse course later.
I know this response by the bond market is antithetical to most. As I've stated in several columns, though, I think the Fed economic model is providing an erroneous signal on the strength of the U.S. economy and the decline in Treasury yields this year is a signal from bond market participants that they are of the same opinion.
So, on monetary policy, my only concern is does the Fed reverse course without another rate hike occurring first, or afterward?
In either case, I see few logical paths to support an increase in long-end yields, driving up mortgage rates, and snuffing out the possibility of a resurgence in first-time-homebuyer activity next spring.