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I don’t know about you, but I feel like I’m trapped in a real life version of the movie “Groundhog Day.” That’s the hilarious early-1990s comedy where Bill Murray’s character travels to Punxsutawney, Pennsylvania to cover the February holiday. Unfortunately, he gets stuck there, and has to re-live that day — over and over again.
Just look at what happened this week: There was yet another move from the Federal Reserve to save the markets — this time in the form of a 75-basis point cut in interest rates. That sparked more bottom-calling from many of the talking heads on TV. And it fueled another 400+ point rally in the Dow.
I don’t mean to sound cavalier, but has anything really changed? Isn’t this the same movie we’ve seen four or five times since last summer?
First, the credit markets seize up in some way, shape, or form.
Second, stocks start falling.
Third, the Fed, the Treasury Department, or Congress steps in and announces another plan to fix the housing and mortgage crisis, or to loosen up the credit markets.
Those interventions keep preventing the stock market from experiencing a big “flush” — a truly nasty decline that cleans out all the sellers and potentially sets us up for a larger, more lasting rally.
Instead, each new plan helps spur some buying. We spend a few days or weeks working off “oversold” market conditions. Then we go right back to square one again.
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This one-step-forward and two-steps-back momentum looks exactly like what we saw during the 2000-2002 bear market. And so far, there doesn’t seem to be much lasting evidence of a reversal.
This trend is also playing out on Main Street with property values. Let me bring you up to date on …
The Latest on Residential and
Commercial Real Estate
Wall Street’s largest banks weren’t the only ones treated to a gift this week. The regulatory body that oversees Fannie Mae and Freddie Mac also loosened capital requirements for the two firms.
The Office of Federal Housing Enterprise Oversight will now require they hold surplus capital of just 20%, down from 30%. It also suggested that threshold will fall with time.
The goal is to free up money that Fannie and Freddie can use to buy or guarantee billions more dollars worth of home mortgages. That, in turn, is designed to lower the spread between rates on mortgage-backed bonds and U.S. Treasuries — something that would lower the rates borrowers pay on home loans.
It’s not such a bad idea for the mortgage market, as ideas go. But home prices continue to fall, and housing inventories remain extremely high.
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Is there any evidence of a turn yet? Not as far as I can see. Just consider …
- The National Association of Home Builders, which tracks how builders perceive sales activity and buyer traffic, said its benchmark index remains mired in the muck. The index held at 20 in March, just off its record low of 18 in December and far below the year-ago level of 36.
- Meanwhile, single-family home starts dropped another 6.7% in February to 707,000 units at an annualized rate. That’s the lowest since January 1991.
- Building permit issuance for both single-family and multi-family property dropped to the lowest since 1991. That indicates future construction activity will be even weaker.
And what about commercial real estate? There is troubling news trickling out of that side of the market as well.
For example, a key architectural billings index plunged 8.9 points to 41.8 in February. That’s the lowest level since October 2001 — right after the 9/11 terrorist attacks.
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The index is a major leading indicator of future construction activity since you need to hire someone to draw up plans before you start work on an office tower, warehouse or hotel.
It also confirms an earlier report from Reed Construction Data, which showed the value of non-residential construction tanking 13.1% year-over-year in January.
What’s more, the Moody’s/REAL Commercial Property Index dropped 0.6% in January. That was the third monthly decline in a row. Prices are still up from year-ago levels. But the rate of appreciation is slowing rapidly — exactly what you saw in the residential market before values started falling.
Because the Carnage Continues Unabated,
I Suggest You Continue Avoiding
Housing and Mortgage Stocks
I would still avoid housing and mortgage stocks, even after this Fed intervention and Fannie/Freddie news. I also think the commercial REITs are vulnerable to even deeper declines, given what we’re starting to see in that part of the business.
If you’re more aggressive, and you have some capital available to speculate, you can look into put options on stocks vulnerable to the weak economy and the real estate slump.
Let me tell you, there are plenty of them out there these days, and any gains on those options can help offset losses elsewhere in your portfolio.
The bottom line: I think you have to be defensive in this market. The pattern of large short-term, short-covering rallies — followed by fresh moves to new lows — is classic bear market action. Until we see some panic selling, this grinding process is likely to continue playing out.
But always remember, eventually this interminable Groundhog Day of a market in housing and financials will end. That’s when it’ll be time to buy with both hands.
I’ll do my best to let you know when that time comes!
Until next time,
Mike
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