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Examiner
  • Ron Finke: Housing: Real rebound or future crash?

  • After the stock market meltdown of 2000 to 2002, I can recall a lawyer friend of mine saying that he was through with stocks and was headed for the real estate field for investing. I also recall seeing the high price to earnings ratios of the homebuilder stocks in 2005 and ’06, wondering how long their growth pace would last.

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  • After the stock market meltdown of 2000 to 2002, I can recall a lawyer friend of mine saying that he was through with stocks and was headed for the real estate field for investing. I also recall seeing the high price to earnings ratios of the homebuilder stocks in 2005 and ’06, wondering how long their growth pace would last.
    The Federal Reserve, Congress and the Housing Department of the government made it easy for everyone to play. Everyone should own a home, whether they can afford it or not. And now, as Paul Harvey would say, we know the rest of the story.
    Amazingly, the major regional and national home building companies have survived and are thriving again. The bottom was brutal on the small local firms owned by your second cousin, and now, once again, there is actually a shortage of framing crews and other skilled laborers even in the Kansas City area. Are we in danger of blowing another bubble?
    The iShares Dow Jones U.S. Home Construction Index Fund (symbol ITB) has gained 189 percent from the bottom of the second dip in early October 2011 through Monday’s close. According to U.S. Census data for building permits (www.census.gov/construction/pdf/bpsa.pdf), the nation is back above a 900,000 annual rate of new private housing units.
    The U.S. Census website is not as user friendly for current household formation, but the recent figures I have read indicate that we need about 1.6 million new housing units nationally for our young people. If true, the current pace of building should have some staying power. This is all good news.
    The rest of the story is the financing. We have taken great pains through horribly vague and burdensome legislation (my opinion) like the Dodd-Frank Wall Street Reform and Consumer Protection Act. It is supposed to protect us from big banks of all stripes and other financial companies, but where can we hide from a government that is Way Too Big to Fail, but lurches from crisis to crisis.
    Jed Graham of Investors Business Daily recently detailed the trend for financing this new wave of home building (http://news.investors.com/economy/041613-652121-government-loans-exceed-private-consumer-financing.htm). In 2006, private companies furnished twice the money that came from the federal government. When the merry-go-round stopped, the government took over and during the past two years, the two sources of mortgage money became equal at about $6 trillion each. Even though the crisis is over and housing is rebounding, Freddie Mac and Fannie Mae, recently on life support with billions of bailout money from us, are now going full speed ahead, crowding out the private sector.
    The same thing has happened in student loans. Uncle Sam decided everyone should go to college whether he and she needed to or not. It consequently made it easier to borrow money for almost any education. What happened? Cost of all higher education went through the roof. Students now struggle with a record level of debt, having risen by 58 percent in the past seven years (http://www.huffingtonpost.com/2013/01/31).
    Page 2 of 2 - Housing, health care, cradle to grave education. The pessimist says, “Things can't get any worse!” The optimist says, “Oh yes they can!” (I'm the optimist).
    (Past performance is no guarantee of future results. All data from Worden Brothers, Inc., TeleChart software, 2013.)
    Ron Finke is president of Stewardship Capital, a registered investment adviser. This is general advice and not meant to contain specific recommendations. Reach Finke at rcfinke@stewcap.com.
     
     
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