Shadow Inventory Has Become Less Relevant to the Housing Bottom Debate

(This is an excerpt from an article I originally published on Seeking Alpha on January 23, 2012. Click here to read the entire piece.)

Earlier this month, I argued that 2012 is the year to start betting on a bottom for housing in 2013 (see “Time to Buy the Dips in Homebuilders“). One of the knocks on any bullish thesis for housing has been the persistent overhang of “shadow inventory” of homes that are not yet on the market as they await official foreclosure. According to another detailed analysis from my brother, it seems that this argument has finally become much less relevant. I present his thesis and data below with his permission and some editing. His analysis covers the Atlanta housing market, one of the country’s metropolitan areas hardest hit by foreclosures. Last year, some prices in the Atlanta metro area tumbled to levels last seen in the 1990s. So, I am taking careful note of this evidence that the problem of shadow inventory has likely receded.

I continue to recommend buying the dips in homebuilders like KB Home (KBH) or sticking with the SPDR S&P Homebuilder ETF (XHB) to minimize the impact of company-specific risks. The steady run in these stocks since the October, 2011 lows has produced some very rich valuations. For example, Toll Brothers (TOL) has a forward P/E of 31 and a price/sales ratio of 2.6. The realization of macro-economic risks throughout 2012 are likely to motivate profit-taking and retrenchment. These moments will produce ideal buying spots.

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{snip}

…The median for sale price of the REOs is not even half of the mean for sale price of the total homes for sale in any of the four counties. In Fulton and Dekalb counties, REO prices are about a quarter of average prices.

…{snip}…few of the REOs could be considered potential substitutes for typical shoppers looking for new homes. In other words, the shadow inventory should not be considered a threat to new home sales in the Atlanta region.

{snip}

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Be careful out there!

(This is an excerpt from an article I originally published on Seeking Alpha on January 23, 2012. Click here to read the entire piece.)

Full disclosure: long KBH

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