Housing: Remain Cautious

This article was written with Oliver Pursche, of Gary Goldberg financial network. It was part of a series of articles developed under an agreement with minyanville.com to work with a variety of contributors and assist them in delivering actionable investment ideas each week.

Last week, an encouraging report came out. The Standard & Poor’s Case-Shiller home price index jumped nearly an entire percentage point in August, the fifth straight month of gains.

Five months is a long time. But the question for investors — and especially for investors considering whether to buy a home or sell one — is: Are we past the bottom?

My feeling is that we aren’t. Here’s the reason: The Basel III banking accords, adopted by US banks earlier this year, will be implemented during the early part of 2013. The new rules are complex; in summary, a higher risk weighting for real estate-related assets will have two important outcomes, in my opinion.

First, these new rules will have a dampening effect on mortgage lending. The higher capital requirements, hence lower profitability, will diminish banks’ appetites for real estate-related lending.

This is not, in my opinion, what the country needs now, but that’s besides the point, in the short term, for investors. The second and more immediate implication is that real estate in general and distressed real estate in particular will be a significant drag on a bank’s soon-to-be-higher capital requirements.

This, combined with the lower profitability of real estate lending, will cause a flood of foreclosures to come onto the market in areas like Miami, Phoenix, and other badly hit real-estate markets.

Moreover, I can’t see demand rising much above tepid in the current environment. A slow growth economy, continued high unemployment, and more of the current presidential administration — or the uncertainty of a new one — will conspire to keep many would-be buyers on the sidelines.

So in summation, five straight months of improvement is more likely a “dead count bounce” than the bottom of the housing market. Avoid the housing stocks for now, and if you need to sell, sell now. As a buyer, it might be worth waiting as there are likely to be better deals down the road.

Prices for many homebuilders’ stocks have appreciated. My advice: If you think now is the time to buy them, you are setting up yourself to get fooled again. If you buy them anyway, I’ll just get on my knees and pray.

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