The Housing Market's Un-Recovery

The Housing Market's Un-Recovery

The nation's real estate market is anything but stable. Just when we think prices are starting to climb, Washington throws a curveball.

When I'm not traveling, I spend most of my time writing and researching the markets from my farm here in Wisconsin, but yesterday, I drove into the city. It's been unseasonably warm, and everything has been wet and muddy and gray.

But the Christmas and holiday decorations give the scenery a nice and cheerful pop of color.

There's a well-to-do community lining Lake Drive as you head into Milwaukee County. Here, the decorations are stunning, with evergreen garland scalloping the front gates to multimillion-dollar homes.

There's a sweeping lake view in the back, but the front is where all the action is: lights, bells, bows, oversized ornaments...

This community decorates to the nines.

But I noticed something else on my drive into the city.

Replacing all those "For Sale" signs I told you about several months ago are remodeling signs. New siding or porticos, updated windows and garages.

In all, there are probably only 15% of the "For Sale" signs left from a couple of months ago.

Now, without knocking on doors, we're left with two results... Either folks were able to sell their homes, or they weren't.

Judging by all the remodeling signs, more folks took their homes off the market to make some updates that will help sell the place. It's still a buyer's market out there. Let me give you some stats for Wisconsin...

In November, 3,874 houses were sold, according to the Wisconsin Realtors Association. That's about 540 more homes than November 2010. But the median home prices for sold homes averaged $133,900, down from $137,000 last year.

This is happening around the country, too. The Federal Housing Finance Agency said home prices fell 0.2% across the nation in October, and September's housing prices weren't as rosy as they looked at first. They were revised to a gain of 0.4% from the 0.9% figure initially announced.

In all, housing prices have fallen 2.8% from last year.

But the news gets worse.

The National Association of Realtors revised the number of homes sold between 2007 and 2010 down by 14%!

That is a huge revision... with even bigger consequences. Investors could be making their decisions on shoddy information, and even homebuilders themselves could be making bad business decisions based on misrepresented data.

It's like an "un-recovery"... We think things are on the upswing, and then, "Oops! Sorry about that. We didn't dot our i's and cross our t's. Our numbers were off by 14%!"

With housing prices the lowest they've been since 2003, and looking to keep falling in 2012, this sets up a tough year ahead for homebuilders yet again.

NYMEX Chart
View larger chart

This chart shows the SPDR S&P Homebuilders ETF (XHB:NYSEARCA) and the iShares Dow Jones U.S. Home Construction Index Fund (ITB:NYSEARCA).

Now, both are off their lows from early 2009, with the XHB trying to stage more of a comeback than ITB. But 2012 isn't going to do either of these ETFs any favors. The XHB has climbed significantly since October, but I think it's going to hit a wall.

And when the XHB hits a wall, it falls hard.

Back in April 2010, the XHB peaked at about $19.64. By July 6, it had traded down to $13.88... a drop of 30% in 2 1/2 months.

The XHB spent the next year climbing back to $19 a share. Then, this ETF went from $18.30 to $13.18 in less than seven weeks... another drop of 28%!

I think we're going to see another significant drop once we get into 2012. The XHB might have a little less than a dollar of upside before another fall comes.

The other homebuilders ETF we mentioned is in the same boat.

ITB went from $15.67 to $10.95 between May and early July 2010, and from $13.07 to $8.86 between July and mid-August 2011, drops of 30% and 32% respectively.

We'll be watching these two homebuilder ETFs closely as we head into the new year.

We might get a great chance to capture some gains from this struggling market.

Publisher's Note: If you want to take advantage of the volatile swings in the homebuilder sector, you need to see how Zach Scheidt told his readers to play the action yesterday. It's yet another secret of the hedge fund industry... revealed.

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