Housing Finding a Bottom

Jeremy Glaser: I'm Jeremy Glaser with Morningstar.com. We got another piece of bullish housing news this morning with the S&P/Case-Shiller Index showing its second straight sequential increase in housing prices.

Here to discuss this with me is Eric Landry, associate director in our equity research department. Thanks for joining me, Eric.

Eric Landry: Hi, Jeremy.

Glaser: Were you surprised at all by this increase?

Landry: No, we were not, and we were one of the few that were not surprised. We actually put out a report for our institutional clients in May that said, "Look out, folks. Sequential increases for the Case-Shiller Index are coming."

We forecasted increase last month, this month, and also a stronger increase next month.

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Glaser: Were there any regional variations in this report?

Landry: Well, luckily, or fortunately, I guess I'd say, is that most regions were up. The only ones that were down were Detroit and Las Vegas; and Detroit had actually gone up the month before. Las Vegas remains the biggest problem in the index.

What used to be another big problem, Phoenix, which was down more than 50% along with Las Vegas, actually had its first up month in several years.

So, I would say, regionally things are pretty strong throughout except for Las Vegas, and now Detroit.

Glaser: Do you think these numbers indicate that we've hit a bottom in the housing market?

Landry: Well, the bottom's a tenuous thing, but I think the odds are probably pretty good that a bottom is more likely than not. We've seen significant reductions in inventories. We've seen prices come down to a point where they're attracting lots and lots of buyers.

I said this in the last video; I'll say it again. The foreclosure market is really, really hot right now. People are shopping for foreclosures, and there are actually many more buyers than there are actual foreclosures now.

What that tells me is that prices have come down, and in places like California, they actually overshot in the beginning parts of this year. That's why you saw such a frenzy of people looking for these buyers.

Now, I will say this, Jeremy. There's also been some artificial stimulus injected there with the government, the $8,000 credit. You had the $10,000 credit on top of that for a new home in California, maybe depressed mortgage rates and whatnot. But I think what that has done is prime the pump, and with any luck we should be able to bump along the bottom here, if not gradually increase just a little bit over the next several months or quarters.

Glaser: Do you think that the government is going to take further steps to try to push the housing market, extending the tax credit or coming up with other incentives? Or do you think that we've basically seen the stimulus that we're going to get in the market?

Landry: I think it's possible that it's the former. There are bills being introduced in both houses of Congress right now for an extension of the current tax credit, and there's even some thought to making it larger. There was talk about a $15,000 credit.

But I wouldn't be hung up on that right now. It's kind of touch and go. I really don't know. There's a possibility it'll be extended, though.

Glaser: What's the impact of being potentially at the bottom of the housing market for the homebuilders?

Landry: Well, the homebuilders right now are actually discounting quite a bit of good news. The group itself has had a huge rally since it made its low several months ago, and there are really no homebuilders right now that we would recommend buying. There's just no margin of safety right now.

If people are looking for exposure to the housing market, you might think of something like Mohawk, which is still relatively cheap. It's trading below $50 last I checked, and we think it has a normal earnings power of somewhere around $5, even more, per share in normal environments.

That may be one people could look at, but I would say by and large most of the bargain bin in the construction sector has been picked over.

Glaser: So, investors should probably look to maybe other home improvement stores. I know that we were talking earlier with our retail analyst that stores like Lowe's look very attractively priced, and Home Depot.

There might still be opportunities for investors to get exposure to the housing market, but probably not through the homebuilders.

Landry: I would say yes. I don't know much about Lowe's and Home Depot, but I could say that definitely the homebuilders have rallied quite a bit from their lows and do not offer a large margin of safety at this point.

Glaser: OK. Well, thanks so much for talking with me today, Eric.

Landry: Sure, Jeremy.

Glaser: I'm Jeremy Glaser with Morningstar.com. Thanks for watching.