Neighborhood Update

This is an update of my tracking of a specific neighborhood in my area, in an effort to gain further insights to the current state of residential real estate market.  The last update is here.

Well, there were finally a couple of sales.  That's the good news.  The bad news is that one sold for $335,000, and, the other went off at $352,000.  The first one didn't look like a distressed sale since it appears from the public records that the sellers were move up buyers.  The second looks like a divorce sale.  Neither sales were the short sale available in the neighborhood.  That one is currently listed at $379,000, lowest in the neighborhood.  The other 7 active listings all had price reductions during June ranging from $5,000 to $24,000.  So apparently the rush to the bottom continues.  The 2 sales are going to set bad comps in the neighborhood and time is running out on the Selling season.  Anyone needing to sell is going to have to hurry.  I suspect we'll see some of the active listings de-list in September if they don't have to sell.  Disappointment is going to set in when they had originally listed their home for $425,000 and are seeing homes go off at $350,000.

Equity Indices

It's been a wild ride in the markets of late.

After getting the anticipated breakout, the Naz pulled in and made a stick save at the 50 day ema.  The subsequent rally was stopped in its tracks due to lack of progress by our politicians, bringing the market back for another test of the 50.  Failure there would be quite discouraging for the market.  The indicators are rolling over.  The stop should remain under the 50.  Long term trendline support comes in around 2700, as seen below.  That would be a good spot to establish long positions.

Longer term the market continues to hold its uptrend.  The key pivot is the 50 week ema around 2670.  A good long entry would be near 2700 with the stop at 2665.  The indicators are weakening which may push the market below the trendline.  Perhaps once we get a debt ceiling deal the trend may become clearer.  Until the trend becomes clearer

REIC stocks

With many single family home stats to be released this week, it's a good time to revisit the Real Estate Industrial Complex (REIC) securities.

 The Homies don't look to be in very good shape.  After breaking their uptrend the Builders fell back setting a potential neckline at 17.  After catching a bid at the 200 day ema they rallied back up to the trendline setting a potential right shoulder.  Since then the XHB has pierced its 20 & 50 day ema and looks destined to test the neckline.  A break below targets 15.5.  The indicators are still pointing down, making a break look probable.  News stories suggesting home buyers are passing up new homes in favor of used homes certainly aren't help the builders prospects.

 In the meantime, many of those not buying/selling a home are turning to updating their current homes as shown in the Residential remodel index.  This is ancecdotally evident in my neighborhood where a slew of construction trucks can be seen on any given day.  Apparently the remodelers aren't shopping a Lowes however.  I't been locked in a downtrend since April.  It sure looks like it has a date with destiny at 20.5.

The giant, Home Depot, is fairing better.  It might be a long candidate at 34.8, but I'd keep this one on a short leash.

Lumber is in a nice basing pattern.  After rattling around the bottom of the base in May it has recently broken up.  The top of the base is the target, 320.  Of note, the paired trade suggested in May has worked out nicely (long Lumber, short Plum Creek).  PCL has a little more downside, but this trade needs to be lifted soon.

 The REITs have been unable to gain much upside traction since May.  They look to be forming a wedge.  A decent break down out of the wedge, below 60, sets the stage for a test of the 200 day ema around 56.5.  The indicators are pointing down, suggesting a likely break down.

Weyerhaeuser has a decent chance to hold support at 21 creating a pretty objective long entry.  A stop below 20 creates a pretty good risk reward situation.  In the meantime, it sports about a 2.8% yield.

Lastly, interest rates continue their downward trend.  1% on the 5 yr looks like the target.  With 2 yr rates in the PIIGS countries over 15%, the safehaven bid in the US Notes looks alive and well.  Now if we could figure out the debt ceiling resolution...but that's another story.
This week's Single Family Starts & Sales data may have an impact on the above securites.  I'm waiting with baited breath ;o)

QQQ's

After a quick sprint up, the Naz has been pulling in.

The weekly chart shows the Naz still above its 2+ year uptrendline.  Until that line breaks it must be assumed the market is still in an uptrend.

Zooming in a bit, the Naz is threatening its 50 day ema.  A close below would be a signal to sell.  Good longer term support is at the lower blue line shown above.  The indicators are a bit extended and may need a further pullback to reset.

CRE Vacancy Rates

June Commercial Vacancy Rates have been released.

Office Vacancy Rates have been stable near 17.5% for the last 6 quarters.  With the poor employment report on Friday, no significant improvement in the vacancy rate can be expected this year.  While competition from buildings started in 2008/9 has been fierce, very few new office building starts have been announced which will keep supply at bay.  Any pick up in starts at this point won't show up as supply for a couple of years.

As anticipated Malls are still suffering from overbuilding during the boom.  It's hard to imagine much improvement for the strip malls.  As the consolidation continues within Regional Anchor Malls they should continue to attract the stronger strip mall tenants further weakening the Strips.  I expect the recent increase to Regional Mall vacancies to push up strip mall vacancies.

The star of the show continues to be apartments.  The single family bust pushed many previous homeowners into apartments.  This has resulted in a flurry of apartment building sales and previously designated condo sites to be either converted to, or, started as apartments.  As home prices begin to bottom out and new apartment supply hits the market vacancy rates should bottom in 2012.

Seattle SFR

June statistics were released this week.

Closed sales picked up in June matching 2010 levels.  2009 & 2010 closing were juiced by the governmental credit that were offered.  2011 closings look even better in that light since there have been no artificial inducements to buy.

The Pending sales chart (all charts from Seattlebubble) shows pretty clearly the effect of the stimulus program which ended 5/31/2010...sales dropped off a cliff last year.  It is also interesting to note the effect the stimulus program which ran thru the end of 2009.  It appears the program was able to stabilize sales thru October that year.  With no stimulus in place this year it will be quite revealing to see how sales proceed thru the Fall.  Even now 2011 is the best year since 2007.  In 2007 sales began cliffdiving in June.  I would anticipate 2011 faring better the last half of the year than it did in 2007.  All the market has to do is lumber along at its current pace to beat that.

The most interesting market condition is the low level of available inventory.  This is the lowest inventory number since 2007.  Anecdotal information is pointed to a two tiered inventory.  Run down, overpriced homes are wallowing on the market while spruced up, market priced homes are being aggressively pursued.  I would suspect that the bulk of the inventory has been on the market over 180 days and that the more current, correctly priced homes are the ones resulting in pending sales.  It's pretty evident how that needs to turn out...if the owners of the stale inventory want to move them they need to reprice them.  Those that don't need to move them will delist.  That will obviously lead to lower sale prices.  The good news is that just isn't much inventory which will soon put a floor under prices (probably the end of this year).  In fact, low inventory levels are current supporting prices.

Prices turned up in April.  Whether this turns out to be the typical "Spring bounce" or something more sustainable will depend on the activity levels thru the Fall.  I suspect pending sales remain stable thru the Fall, further decreasing inventory levels allowing for prices to stabilize later this year.

Market Indices

The market caught the anticipated bid at the long term trendline.

Volume came in a little light, but it was a holiday week.  The indicators are curling up from oversold.

The Naz hit its 58 target a little faster than anticipated.  The market is currently near its right shoulder target.  Head & shoulder patterns are often questionable, since the market has a tendency towards going higher.  The indicators are still pointing up from very oversold conditions.  In addition, some other indices, shown below, have broken thru their respective downtrendlines.  I'm going to be watching the Naz closely to see if it too can break its downtrend.  A meaninful break below the 50 day ema will be a time to book profits.

 The Transports didn't flash the potential head & shoulders pattern, but have broken decisively above the downtrend.  The indicators are nearing overbought but still have some room.

The Semis also broke above their near term downtrend line.  They still hold the potential for a head & shoulders top with the right shoulder target near 36.75.  Short term this helps the case that the Naz will break its downtrend, but it doesn't shout "all clear."

Construction Spending

Private Construction Spending numbers were recently released.

Non-Residential private spending is off over 10% since 2008/9.  It is near lows met during the early 2000's slow down.  Non-Residential spending never exploded as much as residential during the Boom as is quite evident on the chart.  Non-Residential could bottom near 1150 during 2012.
Residential spending has been bouncing along the bottom and is at mid 1990 levels.  Residential spending has dropped over 25% from the peak.  I would expect residential spending to increase from here.  Single family construction won't be the impetus.  There is still too many excess existing residences to spur a whole lot on new home construction, however, builders have whittled their inventories down to bare bones.  While single family construction may not add to total residential spending, it won't be the drag that it has been.  Multi-Family construction will be where the increase shows up.  Tight apartment vacancies have spurred new multi-family starts.  This will add to total residential numbers later this year and into 2012.
Not shown on the above chart (which is from Calculated Risk) is governmental spending.  With the Build America Bonds program completed 12/31/2010, I wouldn't anticipate many new government sponsored construction projects starting (they are already started).  Government sponsored construction has kept many contractors busy during the slowdown.  Currently, the idea of additional government stimulus seems dubious at best.  One of the key questions facing the construction industry is whether or not private construction can pick up the slack.  I imagine the answer will be quite evident by the end of the year.