Has The Housing Market Finally Bottomed?

Is the housing market FINALLY... at long last... close to a bottom?

If you ask Jamie Dimon, CEO of JP Morgan Chase (Sym: JPM), he'd certainly say so. 

In comments made earlier this week, the leader of one of the largest residential mortgage lenders in the country said that he sees increased demand for more new homes, and that the housing market is likely nearing a bottom.

And we'll get greater detail tomorrow when JPM reports 4th quarter earnings.  The company has been more upbeat in the past several quarters when it comes to the health of their existing loan portfolio.  They've been reducing their loan loss reserves as credit quality has been improving, which has been a boost to the bottom line.  His recent comments hint that management will also give a positive outlook for loan and credit expansion, particularly for loan demand in the home purchase market.

Adding further evidence to his claim, Lennar Corp. (SYM: LEN) -- the third largest US home builder -- reported earnings yesterday.  Revenue climbed 11% to $953 million in the 4th quarter from $860 million from the prior year's comparable quarter.

What's most compelling was that new home deliveries increased 9% while their order book (backlog) increased 20% -- a solid indication of robust future business.

In the earnings statement, Lennar's CEO Stuart Miller was quoted as being "cautiously optimistic" and that "we have seen a bottom formed and we will start to see a market recovery."

The economic data also points to major stabilization in the housing sector.  Here are three quick charts...

Housing starts -- measured by home builders breaking ground on residential structures -- bottomed in recent months and is now beginning to trend back up.  Applications for new building permits have also followed suit.

 
New home sales -- measured by a committed sales contract for purchase -- are also showing a similar pattern.  Although far from the peak in 2007, there is strong indication of stabilization and a slight upward trend.
 

And finally, take a look at construction spending, which was ravished during the darkest depths of the recession.  The latest data showed a small annualized growth in this sector (+.05%), which is a stark improvement over the past several years.  Most notably, the breakdown showed strength in the single-family and multifamily subcomponent.
 

Price Action is Truth!

The broad market put in its last major bottom in early October 2011, with the SPX gaining roughly 17% since.

But what may surprise you is that the Home Builders sector has gained roughly 49% in that same span!  The relative strength is truly compelling and a standout.

Take a look at the S&P SPDR Homebuilders ETF (XHB).  It's highly liquid and a good way to get diversified exposure to US homebuilders.

 
The technical action looks extremely bullish and validates the recent positive statements and economic data with regards to the housing situation.  The price action is inherently organic, as the shorts and short covering has long exited the scene.


The Fed is All Over Housing

The Federal Reserve currently has an expanded, self-proclaimed dual mandate:  price stability (inflation) and employment.  Right?

Wrong.  Don't kid yourself for one moment.

They have a third mandate:  propping up the housing market by any means necessary.  They've even recently published a paper meant for Congress to garner fiscal policy stimulus ideas.

The Fed knows how extremely important the housing sector is to a sustainable recovery -- it represents 15% of US economic output.

The Fed's original QE program in early 2009 involved buying $1.25 trillion in mortgage debt to drive down housing borrowing rates.  When they completed a second program (QE2), buying $600 billion in US Treasuries, they decided to keep their balance sheet steady at $2.9 trillion by reinvesting the run-off proceeds in more mortgage debt. 

The latest manipulation, Operation Twist, flattened the long yields even further, driving down mortgage rates that now are just below 4% for a 30-year fixed.

At their next FOMC meeting, January 24-25, the committee plans to publish interest rate forecasts which will supercede the previous forecast of mid-2013 for any changes to the fed funds rate.  My guess is that the new forecast will further push out the chance for a rate hike -- and the result will be an even flatter yield curve, driving mortgage rates even lower or preventing a rise.

There's also talk of another round of QE -- increasing the balance sheet -- and it will no doubt target buying more mortgage backed debt.

The bottom line here is that the Fed will continue to backstop housing, which increases the likelihood that a bottom has finally been put in place.

Aside from the homebuilder ETF, XHB, you can get exposure to the home builders through their individual equities.  The biggest and strongest you can put on your radar besides Lennar (LEN) are D.R. Horton (Sym: DHI), Pulte Group (Sym: PHM) and Toll Brothers (Sym: TOL).