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I've been trying for the past six months to sell my mom's house, which sits in a pretty nice neighborhood in suburban Pennsylvania. Two things I've learned from the process: Prices are still falling dramatically, and as they do, they create a domino effect that brings down the value of all the residential properties in the process.
So when someone tells me a housing recovery isn't too far away, my first instinct is to laugh ... then, eventually, listen to what they have to say.
A recovery here to stay
Recently, the CEO of Toll Brothers (NYSE: TOL ) , a $3 billion residential builder, hinted that he felt the U.S. housing market would gain some energy by 2012. In fact, he said, "I think 2011 will be an improving year, but I think 2012 will be a big year for us." Despite still seeing a drop in visitors at its sales offices, CEO Douglas Yearley said the quality of the visitors is improving, which could be an indicator that buyers are less timid about the prospects of the market.
Singing a similar tune a few days ago was Freddie Mac's chief economist, Frank Nothaft. He thinks that 2011 will be a big year for housing, and that the combination of low interest rates and a bottom for house prices will support a recovery in both construction and mortgage markets. Because the Fed is expected to keep the fed funds rate between 0% and 0.25% for the next year or so, this could be a great sign for REITs such as Annaly Capital (NYSE: NLY ) , Chimera (NYSE: CIM ) , and Hatteras Financial (NYSE: HTS ) . These companies typically rely on cheap borrowing, and invest in mortgage pass-through securities that are usually guaranteed or issued by U.S. government agencies.
Nothaft thinks that when the economy stabilizes next year (if it stabilizes, that is), "many first-time buyers will be attracted to the housing market in the new year, likely translating into more home sales in 2011 than in 2010."
So what's the best way to play?
It's hard to take some of the optimists at their word; we'd all love to believe that a recovery is just around the corner, but some of the data certainly doesn't seem too great. In October, new home construction fell to an 18-month low. Housing starts fell 11.7% in the same month, down from 588,000 to 519,000; according to a census by Briefing.com, analysts were estimating about 600,000 new starts. Karl Case, co-creator of the S&P/Case-Shiller index of property values, recently said it would be "another couple of years before you really can declare victory."
That said, if you're a believer that things might get better in the next year or so, now could be the time to jump on some of the big domestic residential builders. So far this year, The Ryland Group (NYSE: RYL ) , PulteGroup (NYSE: PHM ) , and KB Home (NYSE: KBH ) have all fallen substantially -- Pulte as much as 33%. Another option would be to get in on the REITs mentioned above, especially if you're looking for a nice dividend in the process. All three of those REITs pay dividends greater than 13.5%, and while those payouts won't necessarily go on forever, they could be a great income play in the interim.
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