The time to buy is when the blood is running the streets, right?
Well, what about housing? It’s been dead for so many years that its blood long ago stopped flowing. Surely this famous piece of advice from Nathan Rothschild doesn’t apply to that sector?
Don’t be too quick to dismiss the possibility.
Consider the iShares Dow Jones U.S. Real Estate Index fund (IYR – News), an ETF that is designed to represent the real-estate sector. Just one week ago, it traded at a 52-week high. The same goes for the iShares Cohen & Steers Realty Majors fund (ICF – News) .
What does the market know that the rest of us don’t?
For answers, I turned to an investment service called Sound Advice, which is edited by Gary Cardiff and Steve Horwitz. The service regularly devotes a couple of pages of each issue to an in-depth analysis of the real-estate market.
And we should pay attention to their analysis because their service has a superb long-term record: Over the last 15 years, according to the Hulbert Financial Digest, it has outperformed a buy-and-hold by two percentage points per year on an annualized basis.
According to Cardiff and Horwitz, there are several good fundamental reasons for not dismissing the real-estate market out of hand.
A key one is the steady decline in foreclosure rates. They say that this is an early indication that the real-estate recovery is about to begin. Indeed, they point out, “in the late 1980s [in the wake of the S&L crisis], this was the best indicator for knowing when the recovery was near. As foreclosure rates dropped, the ensuing recovery began.”
According to these two advisers, foreclosure rates began to ease in last year’s fourth quarter. To be sure, that decline has been dismissed by many as being merely temporary, caused by various banks’ freezes on foreclosure actions and massive delays in the processing of foreclosures.
But Cardiff and Horwitz detect at least one straw in the wind that suggests the declining foreclosure rate might be more enduring.
This straw is the falling number of new default filings. Since a foreclosure has to begin with a default filing, such a decline must eventually translate into a more lasting drop in the number of foreclosures.
Compared to around 100,000 new default filings that were recorded each month in the spring and summer of 2010, they dropped to less than half that level beginning last October and have remained that low each month since.
In light of this, Cardiff and Horwitz say that they “believe we are witnessing the beginning of the end of the entire crisis.”
This, then, may be what the recent 52-week highs among real-estate ETFs are reflecting. Though those highs may seem counterintuitive, given how awful the news headlines about real estate have been in recent months, it’s worth remembering that the stock market is forward looking. By the time we read about something in the newspapers, it has long since been reflected in stock prices.
Of course, the market is not a perfect discounting mechanism, by any means. But it’s also true that most who bet against the market end up regretting it.
So don’t be surprised if the news in the real-estate sector is better than expected in coming months.
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