You might not enjoy walking a mile in my shoes.
No matter which direction I go, however, I cannot walk away from my own perception that the worst of the financial crises is not yet behind us.
Although my expectations for prolonged impairment of the housing and construction sectors have not wavered, the prevailing sentiment of investors has turned from panic to confidence faster than I ever imagined possible under the circumstances.
Construction-related equities surged mightily last week. Shares of wallboard manufacturer USG
The building blocks of recovery
Fueling this triumphant burst of optimism, data on U.S. housing starts released last week recorded another month of gains in August to a seasonally adjusted annualized rate of 598,000 units. At less than half the construction activity from a decade ago, we're not yet approaching any semblance of normalcy in the sector, but the ongoing string of sequential improvements marks a welcome bounce from the scariest levels reported earlier in the year.
Treasury Secretary Timothy Geithner then confirmed rumors last Thursday that the administration may extend the November deadline for the $8,000 tax credit for first-time homebuyers. Some 1.4 million taxpayers have applied for the credit thus far -- representing $11.2 billion in total incentives -- though one trade group estimates that only 350,000 of those transactions would not have occurred without it.
The industry fears an abrupt end to recovery momentum if the incentives are withdrawn, and is lobbying to extend the program through 2010 and expand it to all buyers, not just first-time buyers. If these requests are met even in part, we can expect some continued strength in related equities.
JP Morgan analyst Michael Rehaut may be counting on such an extension. The analyst lifted his homebuilding sector outlook Friday from negative to positive, and issued overweight ratings on builders Toll Brothers
Cracks in the foundation
While the tax credit program has stoked demand the way Cash for Clunkers did for autos, another government program aimed at stemming the devastating tide of foreclosures has thus far had little impact. The $75 billion effort under way to promote renegotiations of troubled mortgages to stave off foreclosures is not having the desired effect. As I pointed out in June, between 55% and 75% of early renegotiated loans were returning to distressed states of delinquency within 60 days. The sustained pace of foreclosure activity, including 360,000 homes in July alone, suggests that the credit-related portion of the housing equation remains definitively in crisis mode.
Mark Zandi, chief economist at Moody's Economy.com, believes that the program "probably will be overwhelmed by the magnitude of the problem." His company forecasts 4.6 million additional foreclosures by the end of 2010, and a cumulative total of 9 million homes lost by the end of 2011. Loan losses of this scale are not likely to inspire easy mortgage credit from the banks going forward, and the impact upon the existing inventory of available homes can scarcely be overstated.
With a resounding thud, the next shoe in the mortgage crisis is about to drop. I'm not talking about the commercial real estate shoe that has garnered so much attention already, but rather the payment option adjustable-rate mortgages that are due to reset in the coming months. In these resets, mortgage payments can balloon by fivefold to tenfold overnight, and this has federal and state officials acutely concerned about further acceleration in residential mortgage foreclosures.
The Foolish bottom line
With such conflicting forecasts for the residential housing market circulating, I propose that Fools determined to invest in the space consider companies with exposure to a broader range of drivers for construction demand. If my expectations for prolonged impairment of the housing sector pan out, then shares of homebuilders like Pulte Homes may not offer much shelter. With exposure to anticipated demand from stimulus spending in roads and other infrastructure, however, aggregates suppliers like Vulcan Materials
These stone-crushing aggregates producers are seldom in the limelight. Vulcan Materials is a $7 billion company, but only 465 out of 140,000-plus CAPS members have voiced their opinion. Two-star-rated Martin Marietta, with only 178 picks, remains even more obscure. With spending from the $787 billion stimulus program set to accelerate soon, where do you stand? Join CAPS for free and discover the value of community intelligence.
Fool contributor Christopher Barker can be found blogging actively and acting Foolishly in the CAPS community under the user name TMFSinchiruna. He tweets. He owns no shares in the companies mentioned. Cemex is a Motley Fool Stock Advisor selection. USG and Vulcan Materials are Motley Fool Inside Value recommendations. The Fool owns shares of Cemex. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool lives inside a single-family disclosure policy.