Housing Market Momentum Bodes Well for Economy and Retailers

         Housing Market Momentum Bodes Well for Economy and Retailers

PR Newswire

MARTINSVILLE, N.J., Nov. 27, 2012

MARTINSVILLE, N.J., Nov. 27, 2012 /PRNewswire/ -- With an estimated 13 million
homeowners underwater on their mortgages and average home prices nearly 30%
below their 2006 peak – a decline that has wiped out $7 trillion in household
wealth – it is no wonder that many are still skeptical about a housing market
recovery. However, there is reason for optimism, echoed by famed investor
Warren Buffett, who remarked earlier this year that he would purchase "a
couple hundred thousand" single family homes if it was practical to do so
considering depressed real estate prices and the availability of financing at
historically low levels. Against this backdrop, recent trends in the housing
market not only bode well for homebuilders, but for certain retailers and the
broader economy as well, according to Ken Schapiro of Condor Capital

After a precipitous decline following the housing bubble's burst, home prices
have seen a slow but steady improvement so far this year. To illustrate, the
S&P/Case-Shiller Home Price Index posted its sixth straight monthly gain in
September, rising 0.29%, extending the year-to-date increase to 7.04%. Unlike
the temporary gains seen in the wake of the first time home buyer's tax
credit, this year's recovery appears to be organic and self-sustaining. The
average selling price for existing homes has shown even stronger gains, up
11.1% year-over-year in October. This can be partly attributed to a decline
in inventory, with the number of previously owned homes on the market
declining to 2.14 million in October, the lowest since December
2002.Further, the current inventory of new homes is at its lowest level
since data began being collected in 1963. Consequently, new home starts have
been trending higher this year and surged to an annualized rate of 894,000 in
October, the highest level in 4 years. Although this is a vast improvement
over the 478,000 rate witnessed in April 2009, it is a far cry from the
estimated 1.2 million that is needed to keep up with population growth and
household creation. Given the dearth of building over the last 4 years, it is
likely that new home construction will need to accelerate above the historical
average to account for this shortfall. Given the immense money multiplier
effect of the housing industry, this could provide a meaningful lift for
economic growth in the coming years.

However, it is important to note that the pace of recovery could be divergent
between states. States such as Nevada and Florida that saw some of the
steepest declines are now rebounding as investors have stepped in to purchase
large lots of distressed properties. Conversely, more-litigious states such
as New Jersey are likely to have a longer road to recovery. Since such states
require a court review of all foreclosures, distressed properties take much
longer to come to market, something that was only amplified by the recent
"robo-signing" scandal. Shadow inventories in New Jersey are comparatively
large and may pose a headwind to further price gains since distressed sales
are typically executed below a given home's true market value. On the other
hand, the devastation left in the wake of Hurricane Sandy could have a silver
lining for the state in that reconstruction efforts will spur spending and
boost employment of construction workers, one of the hardest hit groups since
the last recession.

Looking forward, there are several tailwinds that bode well for sustained
momentum in the national housing industry. First and foremost, low mortgage
rates and depressed real estate prices have led to a dramatic increase in home
affordability and have swung price-to-rent ratios solidly in favor of
purchasing in most markets. With the Federal Reserve planning to purchase $40
billion a month in mortgage-backed securities in an effort to boost the
economy, mortgage rates are likely to remain low, and could even have further
room to the downside. Additionally, forthcoming rule changes should help
relax today's strict lending standards and improve borrowers' access to
credit. Beginning January 1, 2013, banks selling mortgages to Fannie Mae and
Freddie Mac cannot be forced to repurchase defaulted loans that have
experienced 36 straight months of on-time payment if they were originated
after January 1^st. Aside from these monetary factors, certain social and
demographic trends that have had a drag on housing since the recession have
shown signs of improvement recently. Amid steep job losses, financial strain,
and a weak job market for recent college graduates, new household formation
trended well below the historical average in the past few years. However, in
the twelve months through September 2012, 1.15 million new households were
created in the U.S., up sharply from the 650,000 per year created in the prior
four years. Although unemployment remains stubbornly high, slow improvement
is likely to continue to buoy household creation and drive a
move-out-of-the-basement rally.

Despite regional inconsistencies, it is clear that the national housing
picture is improving. Given this, investors' optimism has already pushed the
S&P Homebuilders Index up by over 50% in the past year. At the same time,
home improvement retailers such as Lowe's and Home Depot also stand to benefit
from the renovation of foreclosed properties as well as the construction of
new homes in the coming years. Other stores, such as Bed Bath and Beyond,
will also likely receive a lift from an increase in household formation as
young people move out on their own for the first time and purchase household

A less obvious winner could be non-housing related retailers, as a gain in
home prices and a decline in the number of underwater mortgages helps
consumers feel wealthier, more financially stable, and more confident to spend
their hard-earned money. Economists estimate that for every $10,000 increase
in household wealth, including the value of one's home, consumers spend an
additional $400 on discretionary purchases. With both home prices and stocks
up nicely this year and a favorable calendar – with Thanksgiving falling on
the earliest date possible – the upcoming holiday shopping season should prove
to be strong. Since wealthier Americans tend to have greater exposure to the
stock market, and therefore have benefited more from this year's rally,
higher-end retailers are positioned particularly well. To that end, a recent
study by American Express Publishing and the Harrison Group indicated that
Americans in the top 10%, measured by income, intend to increase their holiday
gift spending by a staggering 21.9% this year. At the same time, the survey
indicated that the remaining population may spend 11% less. We feel that this
could lead to sales that are divergent between retailers. While Wal-Mart
recently struck a cautious note in its outlook for the holiday shopping
season, those at the higher end, such as Nordstrom and Coach, stand to perform
better than expected due to the so-called wealth effect.

At the time of this article, Condor Capital Management held long positions in
Home Depot, Lowe's, Bed Bath & Beyond, Coach, and Nordstrom in some of its
clients' portfolios.

Condor Capital

Founded in 1988, Condor Capital is an employee-owned, SEC-registered
investment advisor based in Martinsville, N.J. employing 15 professional and
support staff.Since Condor is a fee-only investment management firm, its fees
are based on portfolio size, not sales commissions or number of trades. For
more information on Condor Capital, please visit www.condorcapital.com or call

Ken Schapiro

SOURCE Condor Capital Management

Website: http://www.condorcapital.com
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