Market Overview

Is It Finally Safe to Buy a Home?

Today, the National Association of Realtors reported that US Pending Home Sales rose 7.3% in November vs 10.4% in October. A Bloomberg survey had forecasted that November growth would only be 1.5%. Consumers were buoyed by home prices and interest rates that have continued to remain low. The housing industry has shown signs of life as construction in new homes have increased and more have been purchased. However, some home owners are still facing issues with unemployment and keeping up with their mortgages, as foreclosures continue to dampen home values.

The sales figures are the highest that the NAR has recorded in the past year and a half. A more detailed look at the data reveals that purchases of new single-family properties jumped 1.6% to an annual pace of 315,000. As the inventory of unsold new homes decreases, manufacturers of home building products could see increased demand as consumers become more comfortable with the prospect of buying a new home.

The NAR warned that the numbers could be skewed, in that some home buyers canceled their contracts at the last minute. There is usually a one to two month lag between the time a contract is signed and when a home sale is closed. Nearly one third of realtors reported home buyers backing out of signed contracts, which could improperly skew numbers to the upside.

The numbers affected several companies in today's market. Lowe's (NYSE: LOW) is up 2.35% as current homeowners who are having trouble meeting their mortgage obligations may opt to fix and maintain their current homes rather than purchase new ones. PulteGroup (NYSE: PHM) is also up 4.29% as a decrease in new home inventories could prompt more new homes to be built. KB Home (NYSE: KBH) has followed suit, as its shares are up 3.63%.

The housing market has also been helped by the Obama administration's institution of the Home Affordable Refinance Program (HARP). The program allows owners who meet a certain set of qualifications, such as owning a Fannie Mae or Freddic Mac loan, to apply for a mortgage refinance. While the program was instituted in March 2009, President Obama announced a series of overhauls in the program that took place on December 1, 2011 which would allow underwater borrowers with a loan to value ratio greater than 125% to take advantage of the program.

The program has benefited homeowners as it does not require an appraisal or loan underwriting, making the refinance process much more efficient. Homeowners will also see their refinancing fees eliminated or modified. As a result of the overhaul, homeowners can obtain a HARP refinance through December 31, 2013.

While the positive housing data was enough to drive the markets higher this morning, investors will want to exercise caution in applying them to the overall housing market. While the demand for housing has increased, the appreciation of home values and construction of new houses still faces significant hurdles. As the economy slowly improves, it remains to be seen whether the housing market will come along for the ride.

A contribution was made to this article by Benzinga writer Brandon Pilzner.


ACTION ITEMS:

Bullish:
Traders who believe that strong home sales are positive for the economy will want to consider the following trades:
  • Go long companies such as PulteGroup (NYSE: PHM) as an increase in homes sold will trigger demand for new homes to be built.
  • Go long companies such as Louisiana-Pacific (NYSE: LPX) who manufacture and distribute home construction products and naterials.
Bearish:
Traders who believe that the survey is a leading indicator for the general housing market will want to consider alternative positions:
  • Go short building companies such as KB Home (NYSE: KBH) as fewer mortgage applications and home sales will result in less demand for housing and home builders.
  • Go long do it yourself stores such as Lowe's (NYSE: LOW) or Home Depot (NYSE: HD). If home sales fall, consumers will instead look to maintain or fix up their current homes.
Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

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