Betting on a Bounce: How to Play Housing

It’s been over a year since the housing sector imploded. Yet, it's still at the epicenter of the current economic crisis. Many market watchers are pinning any chance of a broad recovery on housing pulling one off first, so the data emerging out of the sector is closely watched. Indeed, while most investors have steered clear of the industry, other opportunistic ones are reading into the numbers and predicting housing will make a remarkable rebound over the next few years. They are even betting billions of dollars by investing in housing-related mutual funds, exchange-traded funds and individual stocks. The big question: If they are right should you jump in, too?

The problem with answering that is the data are sometimes contradictory. In fact, these days it seems to always be contradictory. Over the last month, investors have poured over numbers on pending home sales, building permits, regional trouble spots, home builder earnings, mortgage rates and foreclosures. For every piece of news that seems to point to a bottom occurring there is another that shows there's still room to fall further. One detail that can’t be denied: Since the 2006 peak of national property values, average home prices are down nearly a third, back to levels last seen in the fourth quarter of 2002.

All that means making a smart investment in the housing sector is a risky prospect. Just like when “no one had a good forecast about when the bubble would burst,” says Jim Diffley, managing director at the consulting firm IHS Global Insight, “there's a challenge to betting that prices have bottomed or are about to bottom and will come up.”

For investors trying to figure out what to do amidst the crisis the most important thing to remember is that national numbers encompass thousands of smaller stories. There are parts of the country hurting more than others — the ailing Southeast vs. the somewhat stable New England area — and parts of the housing market have succumbed more than others — luxury houses vs. starter homes. For example, recently the National Association of Realtors said pending home sales in New England, New York, New Jersey and Pennsylvania were up 36% in April from the previous month’s level. The southern region lost .2% during that same time period. Various other reports say Phoenix, one of the hardest-hit housing markets, has seen the average home price slip 53% from the peak two years ago. Dallas, however, is only down 11%.

“It's something of a cliché, but all real estate markets are local,” says Jack McCabe, an independent housing analyst and president of McCabe Research & Consulting in Deerfield Beach, Fla., a state with the third-highest rate of foreclosures nationwide. "Every market started this boom and bust cycle at different times." Adds Dave McCarthy, chief executive of Integrated Asset Services, a Denver-based company that runs a proprietary housing index on 360 counties: In some local markets “we're starting to see some leveling off. It's at least looking less volatile than the last couple of months.”