Leading Indicators


Last week the Secretary of the Treasury, Hank Paulson, was asked if the residential real estate market had bottomed. He refused to answer the question. But as we approach the New Year, that is arguably the biggest question in real estate. The spring season is right around the corner, traditionally the busiest for buying and selling, and many believe it will tell the true story of the state of the market.

Until then, however, we look to the indicators: The NAHB/Wells Fargo Housing Market Index (HMI), out today, shows how builders perceive the market to be on an upswing, specifically in gauging future sales expectations.

“This was the third consecutive month in which builder expectations for sales over the upcoming six-month period have improved, and it’s a good sign of things to come in the new year,” said NAHB President David Pressley in Monday’s release.

“Other recent indicators confirm that buying conditions have improved and that demand is stabilizing - including improvements in measures of housing affordability, strengthening consumer assessments of home buying conditions and an upswing in applications for mortgages to buy homes,” added NAHB Chief Economist Dave Seiders.

This could bode well for housing starts, which the US Commerce Department releases tomorrow and which many hope will remain low, as the builders get rid of inventory. The National Association of Realtors released its monthly Housing and Economic Forecast last week, with the lead line: “Existing Home Sales in 2007 Expected to Recover from Cyclical Low.”

Still, I say the government and industry indicators are just the tip of the iceberg; look at what’s going on with investors. Today the private equity firm Apollo Group agreed to buy Realogy , an enormous real estate franchiser that owns Coldwell Banker, Century 21 and Sotheby’s International Realty. Realogy is a player in one quarter of all home sales nationally and represents more than 300,000 agents among its franchises, close to three times as many as Re/Max International, its closest rival.

“Realogy’s powerful real estate brands and their long heritage of leadership in the industry serve as a strong platform for future growth and we are pleased to again have it as part of our investment portfolio.” That in a statement from Apollo partner Marc Becker.

Last month we reported that the Bill and Melinda Gates foundation bought nearly 241 Million dollars worth of home builder stocks, including Beazer Homes , Centex , KB Home , Lennar , Pulte and Ryland Group . Despite a 50% drop off from their highs of last year, the sector is up 45% since July.

"The value players are getting in early, they're saying look we want to own these stocks, we know they'll come out of the cycle,” says Margaret Whelan, an analyst with UBS .

Billionaire Carl Icahn is also getting in the game, buying shares of WCI Communities , a smaller builder that hasn’t weathered the downturn well and which could be a prime candidate for some sector consolidation.

Just last month at a UBS Conference of home builders, I asked several CEOs what they thought of their stocks:

“This may be the low point in the stocks, we don't know so I cant tell you whether the stocks going to go up or down, but I can say that I think long term and I think 2007, late 2007 early 2008 we should see some real pickup in the market and the stock market may anticipate that before,” said Ian McCarthy of Beazer Homes.

“The stock’s a good buy if you’re a long term investor. We cant predict the short term but we’ve done very very well for our investors over the last several years, we expect we will over the next several years but for the short term it’s going to be a tough ride until as you point out the fundamentals bottom out,” said a cautious Richard Dugas of Pulte Homes.

I’m not exactly a Wall Street maven, but I don’t need Jim Cramer to tell me that when really big-time investors start buying stuff that maybe that stuff is going to make some money. I’m certainly not going to be the one to call a bottom to the real estate market, but it sure seams like an awful lot of capital is making its way back home.