Housing: Close to a Bottom?

Let's look at the glass as half full: It's a great time to buy a house.

Mortgage rates are low. If you have a decent job, and you've been waiting for the right time to buy a house, most of the downside in house prices may have already passed you by.

Anecdotal evidence
My real estate agent, with 29 years' experience and his own Washington, D.C.-area firm, was quite optimistic about this a month ago. "Things are definitely moving," were his exact words. Housing is regional, of course, and, the D.C. area has lower unemployment than the rest of the country.

Nonetheless, there are signs of a turnaround outside my small circle. John Paulson, one of the smartest investors on Wall Street, previously made a fortune shorting mortgage securities; now he's started a private equity fund to invest in both commercial and residential property.

Paulson is notoriously secretive about his endeavors, for fear that people will piggyback on his investments. But he has hired experts on both the commercial and residential side of the business to help him with the fund. In short, he's up to something.

Smart people buy low
Savvy investors buy quality assets at the lowest possible prices. Warren Buffett bought more Wells Fargo (NYSE: WFC  ) and US Bancorp (NYSE: USB  ) in the first quarter, even though Berkshire Hathaway (NYSE: BRK-A  ) was already Wells' largest shareholder.

Since bank stocks have generally seemed toxic for months, Buffett, too, must be optimistic. Still, Buffett's purchases of selected financial stocks do not mean that you should chase low-quality names in the sector. After all, the Oracle of Omaha was buying when everyone was selling -- at much lower prices. However, if a pullback in the space arrives, higher-quality names like Goldman Sachs (NYSE: GS  ) , Morgan Stanley (NYSE: MS  ) , and JPMorgan Chase (NYSE: JPM  ) are definitely worth considering. Those stocks have rallied massively off their March lows.

What about homebuilders?
Housing starts just slid another 13% in April -- to an all-time-low annual rate of 458,000. Keep in mind that at this rate, houses are being built below the level of new household creation. Yes, there's a large inventory of unsold homes -- but the situation right now is so bad that I can't really see it getting much worse. (Knock on wood!)

Homebuilding stocks -- heck, all stocks -- tend to bottom out before the numbers begin to improve. With that in mind, those brave souls who dare to bottom-fish should keep an eye on Toll Brothers (NYSE: TOL  ) . The company reported a 51% decline in quarterly revenue year over year, but it also reported that deposits for new homes actually rose over the same time frame. Is this inconsistent?

Not necessarily. It appears that homebuilding CEOs have gotten as bearish as they could be, building homes at a record low level. Toll Brothers' stock has been acting reasonably well on bad news. This is a contrarian take, but I like this stock at the right price, and I'd encourage you to add it to your watch list.

Right now is a great time to buy a house, and homebuyers should be smiling. Investors, however, should tread more cautiously.

For more on housing:

Fool contributor Ivan Martchev does not own shares in any of the companies in this story. The Fool owns shares of Berkshire Hathaway, which is a Motley Fool Stock Advisor and Motley Fool Inside Value recommendation. Try any of our Foolish newsletter services free for 30 days. The Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (6)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 05, 2009, at 6:26 PM, riotercero wrote:

    THE 6.7 MILLION EXCESS OF HOUSES BUILT DURING THE BOOM WAS THE DIFERENCE BETWEEN WHAT THE FUNDAMENTAL FACTORS INDICATED, AS QUANTIFIELD BY A MODEL AND ACTUAL HOUSING STARS. TO REDUCED THAT FIGURE BY 3.9 MILLION TO ACCOUNT FOR UNDER BUILDING IN THE 1987-1991 YEARS OF THE SAVINGS AND LOAN COLLAPSE, BUT THAT STILL LEFT A HUGE EXCESS INVENTORY OF 2.8 MILLION--OVER AND ABOVE NORMAL WORKING INVENTORIES--IS ALMOST TWO YEARS OF TOTAL ACTIVITY. SELL THE PUBLIC THE TRUTH

  • Report this Comment On June 05, 2009, at 6:34 PM, portefeuille wrote:

    Warren Buffett bought more Wells Fargo (NYSE: WFC) and US Bancorp (NYSE: USB) in the first quarter, even though Berkshire Hathaway (NYSE: BRK-A) was already Wells' largest shareholder.

    ------------------------

    He usually is.

  • Report this Comment On June 05, 2009, at 7:17 PM, ivanmartchev wrote:

    Permabear or permabull attitudes do not work.

    FYI, I was recommending shorts on CFC in early 2007 and homebuilders as far back as 2005. But, I think most of the damage is done in housing. Now, there is a serious issue with commercial real estate that I have been following, and I can see how housing bottoms and the CRE market turns out to be the next shoe to drop. The bond vigilantes are certainly testing my thesis on the Treasury market, but I hear no one talk about the CRE issue as much as they talked about housing.

    To be continued...

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