The market has also bounced on higher average volume, which is indicated on the volume section of the chart by the black line. Significant? Certainly. When market moves to the upside are driven by higher-than-average volume, it’s a clear sign that bullish investors are getting involved and are willing to buy shares to prove it.

But that’s not all. To find a similar bounce to the one we’re in the midst of right now, I have to go all the way back to last November. Then, the S&P surged from a low of 741 to 944 in January. That translated to a 203-point upswing, or a whopping 27% upside run.

My take: A bounce similar to the one we’re in right now ignited a move of nearly one-third in U.S. stock prices just a few months ago. Considering that we’ve moved 23% in just a matter of days, my thoughts are the recent surge has decent legs.

Sure, we’re not out of the woods yet, not by any stretch of the imagination. But facts are facts, and the recent market action bears that out: We’re moving in the right direction… especially in one of the most important sectors – real estate.

Ever since the financial crisis began, I’ve said that one of the big triggers of a decent, well-founded recovery – in the economy and the stock market – will be an improvement in the real estate sector. And while the latest news isn’t mind-blowing, there are a few positive morsels.

Remember, I’m looking for positive moves in real estate for a simple reason: Improvement in this sector means increased sales and stabilization in prices. That, in turn, will ignite new lending. After all, with reliable prices and positive sales movement, homebuyers know what they’re buying won’t get crushed. And lenders know what they’re lending will likely be paid back.

Now, even when the real estate market recovers, we’re not going to see the surge in prices and buying that started one of the biggest asset bubbles of all times. A ton of that was fueled by under-qualified borrowers and downright lousy lending practices. And while banks have short memories, they aren’t that short.
Rather, the recovery in real estate will begin with baby steps: small moves in the right direction. And the latest news is just that. Take a look…

As you can see from this chart, existing home sales in February jumped to the upside. In fact, compared with January, home sales were up 2.6% in the West, 6.1% in the South and a whopping 15.6% in the West. All told, existing home sales in the United States increased a solid 5.1%!

The news gets better. Sales comparisons with the same period last year – which tend to be less volatile than month-over-month numbers – show some huge bright spots. In fact, while overall home sales in the United States were down 4.6% in February compared with last year, sales in the West were up a stunning 30.4%.

That’s right, February home sales in the West – which includes the super-important Southern California and Las Vegas real estate markets – rose nearly a third compared with last year. Plus, it marked the eighth straight month of year-over-year increases for the region.

Now get this: With the real estate market in the West generating a whopping 1.2 million units in annualized sales, sales activity is now a staggering 38% above its cyclical low point of 870,000 units marked in October 2007.

That means – from a sales angle – a market bottom in this key real estate region is way, way in… and has been so for months.

So what’s driving the bullish numbers in real estate sales? No surprise here: The median home price in February was just $165,400, 15% below its year-ago level.

Sure, we want to see these prices stabilize. But the fact is with 45% of home sales distressed – either in foreclosure or in short sales – these prices are going to take a hit. And while the process is painful, the market needs to clear off unwanted inventory before it can really begin to get back on its feet.

But mark my words: Lower prices aren’t going to last forever. And it’s not just because sales activity is beginning to accelerate. See for yourself…

As you can see from this graph, the National Association of Realtors says housing affordability is rising fast. In fact, at a current level of 167, home affordability is now 25% easier than the year-ago 133 level.

So what does a Housing Affordability Index (HAI) level of 167 really mean? It’s pretty straightforward. An index level of 100 means that the typical family earning the median income in the United States has exactly enough income to qualify for the average mortgage.

So with the HAI at a whopping 167, the average family in the U.S. has 167% of the income necessary to buy an average home. Talk about buying power!

Bottom line: The stock market is in the midst of a solid bounce. Plus, the real estate sector – a big key to a sustained recovery – is showing signs of life, especially in the important West region of the United States. Together, these factors point to more bullish action for stocks down the road.

Best Wishes,
Wayne Burritt

April 1, 2009

How to Play Real Estate’s Recent Moves was originally featured in the Penny Sleuth.

As you can see from this chart, existing home sales in December shot to the upside. In fact, compared to November, home sales were up 4% in the Midwest, 7.4% in the South and a stunning 13.6% in the West. And while the Northeast took a bit of a hit, all told home sales in the U.S. rose a respectable 6.5%!

Good news? No doubt about it. Rising home sales mean that buyers are coming back into the market. And that means that one of the biggest investments out there for most people — buying and paying for a house — is showing signs of health. Now, factor in the ripple effect sparked by home sales transactions — including banking business, contractor activity and a boost in tons of home-related products and services — and the news gets even better.

But that’s not all. The latest report from the National Association of Realtors also shows that the supply of existing homes is falling. With about 3.7 million units on hand, current existing home inventory amounts to 9.3 months of supply. That’s the lowest supply level in a year and is significantly off last year’s high of 11.2 months booked in April.

The culprit? No big surprise here: Tumbling home prices. In fact, during December the average home in the United States fetched $175,400, down 15% from the year-ago period’s $207,000. And while that’s painful for home sellers, it’s also the sign of a sector beginning to right itself.

Here’s my point…

Imagine you’re an average retail store owner. You’re managing the store day-in and day-out, and you know that times are tough. Sales are weak and customer flow is just not what it used to be. And while your daily bank deposit isn’t terrible, it’s certainly not what is used to be.

So, what do you do? In a nutshell, you hunker down. You buy the products that carry high-margins — read: high profits — and that are in big demand. You keep inventories lean by buying just enough to keep the store stocked. And for those inventories that haven’t been moving, you make the oldest move in the book to get them off the shelf: You drop prices.

That’s exactly what the real estate market is doing: It’s lowering prices and, as a result, sales are beginning to spark. And while that may seem plain and simple, I don’t have to remind you of markets where, no matter how low the prices fell, no one wanted to buy.

Bottom-line: While the real estate market is hardly out of the woods, the latest data is certainly a step in the right direction. And no matter how you slice it, that’s a positive for the broader economy and the stock market.

Best wishes,
Wayne Burritt

January 28, 2009

Existing Home Sales Show Glimmer of Hope was originally featured in the Penny Sleuth.

Cycles are an inseparable part of the landscape of markets. Fortunes are often made in the valleys. I was thinking of this after I read several obituaries of Trammel Crow, who died this month. He was a guy who saw many booms and busts over his 94-year life.

Trammell Crow was a big-time developer and died a rich man. The Wall Street Journal once described him as “America’s biggest landlord.” His firm, Trammell Crow Co., estimates it built some 500 million square feet of real estate space. But it was a long road to get there from humble beginnings. His life is one of those great American success stories.

Unable to attend college because of the Great Depression, he took a number of odd jobs, including plucking chickens and unloading boxcars. Eventually, he landed a job at a bank, and then studied to become a public accountant. By 1938, at the age of 24, he was the youngest CPA in the state of Texas.

After World War II, he got his first experience in construction building grain elevators with Doggett Grain. Eventually, he managed to build his first warehouse with a partner and leased it to Rayovac Battery Co. It was his first real estate success. He was on his way.

There would be good times and hard times on this journey. The 1970s downturn nearly bankrupted him. But it didn’t take out any of his risk-taking nature. “I once heard it said that the cat that is burned on an oven range will never touch a hot one again,” he said in a 1980 interview. “True enough, but that cat won’t go near cold ovens either. The same is true for business. Failures that transform a businessman into a super-cautious individual can cripple.”

I also remember Trammell Crow from my career in banking. I started out banking when I was 22 years old. I remember working with a senior lender on a deal to finance a big real estate project. He pointed out that we had to be sure we liked the collateral because the developer might toss us the keys, like Trammell Crow. I must’ve had a somewhat puzzled look on my face because the lender asked me, “You know who Trammell Crow is, right?” And he asked it in a way that you might ask someone today if they know Barack Obama.

I honestly can’t remember what my answer was. I remember the embarrassment of not knowing who he was. Yet he was among the most famous developers in the country. A 22-year-old always thinks he knows more than he does. It’s one of those things.

Anyway, the senior lender was referring to a well-known episode Trammell Crow had with his bankers. He basically tossed a bunch of keys on the table on told them they could either give him new terms on his mortgages or take the keys. They reworked terms.

Old Crow was an American original. He left quite a legacy, and not only in the millions of square feet of real estate and the fortune he leaves behind. Many talented people came out of the Trammel Crow ranks and went on to become major real estate players. He had a huge influence on the industry.

Until next time,
Chris Mayer

January 26, 2009

Trammel Crow: Lessons in Real Estate Investing was originally featured in the Penny Sleuth.

When our portfolios are headed higher, we usually go out and spend like the dickens.  After all, with nice fat investments we feel like we have a lot more money to spend.  And, as well all know, spending drives the economy.  Result:  Stock prices and the economy get a boost.

In addition, the wealth effect is a brand of self-fulfilling prophecy, which makes it even more powerful…

By investing in stocks that go up, we have more wealth.  Having more wealth causes us to go out and spend.  That spending, in turn, causes the economy to grow.  Economic growth then leads to better times for companies which, in turn, lead to higher stock prices.

Unfortunately, the power of the wealth effect works in reverse as well…

When we see our stock portfolios getting hammered, we feel a lot less wealthy.  That loss of wealth causes us to pull back on spending.  Less spending means slower economic growth, which is lousy for companies.  Poor outlooks for companies mean lower stock prices.

And declining wealth isn’t limited to stocks.  Take a look at this chart of real estate prices…

As you can see from this graph, the year-over-year change in home values — indicated by the dark solid line — began to slow around the beginning of 2006.  But economic growth — indicated by the red dashed line — didn’t begin to slow until the middle of 2008.

In other words, the wealth effect in real estate wore off long before the economy began to sputter.  In this case, the declining value in real estate was a huge leading indicator of poor economic activity to come.

In fact, changes in just about any asset — from stocks to houses to commodities — can cause their owners to adjust their spending habits.  And those spending adjustments are going to happen after the owners’ assets take a hit.  And that makes them a great predictor of where things are headed.

I’ve told my readers time and time again that a recovery in real estate prices — and stability in the real estate market — is likely going to be one of the biggest pluses for a stabilized economy and higher stock market values.  Real estate got us into this mess and it’s going to get us out.

Using These Leading Indicators for Profit

So, how can you make money off the predictive abilities of the stock market and other asset classes?

Simple.  While others are waiting for the big economic indicators — such as solid growth, the labor market, and the credit crisis — to get back on their feet, you can slip into key investments long before anybody else gets wind. The markets are telling us loud and clear patience will be rewarded.

Best wishes,
Wayne Burritt

January 7, 2009

Profiting from the Wealth Effect was originally featured in the Penny Sleuth.