Housing Bottom 2011

Brian Hicks

Updated July 7, 2011

I don’t know what’s more infuriating: the fact that Casey Anthony was acquitted in the death of her daughter or that “experts” are calling a bottom in housing again.

And it’s not the usual culprits like the Wall Street Journal and U.S. News & World Report telling us 2011 is the year housing bottoms. This time, calls are coming from trusted analysts hell-bent on being known as the “guru genius” that nailed the bottom.

But they’re likely to fall flat on their faces with these calls…

As one of the guys who warned of the housing crash, I see no reasonable way to call a bottom.

I just read an article by Markos N. Kaminis. A sell-side analyst over a seven-year period at Standard & Poor, Kaminis is confident in his reasons for calling a housing bottom. Russell Price, senior economist at Ameriprise Financial, also believes the bottom is in.

But even Jim Cramer is smart enough not to call the housing bottom with the unemployment level where it is…

There Never Was a Bottom

After an 8.2% pop in pending home sales (which plummeted 11.3% in April), we’re likely to see another drop as mortgage applications fell again in recent weeks. Plus, the 8.2% jump means nothing when sales were down 20.4% year over year…

So forget that bullishness.

New home sales fell in May 2011 for the first time in three months, proving the industry is still struggling. Builders still have to deal with the fact that about two million distressed properties will eventually hit the market. That alone will take years to absorb. Economist Robert Shiller doesn’t see a bottom here, stating home values could plummet another 10% to 25%.

Housing prices need to fall further before we see a recovery, plain and simple.

Inventories are still high, and as many as seven million additional foreclosures haven’t been accounted for. Last week, Lennar bulldozed several partially built homes in California — in one of the areas hit hardest by the housing crash — to rebuild simplified and downsized homes.

“We’ve adjusted our offerings to fit the needs of the people today,” a spokesman for Lennar’s Central Valley division said in a statement.

That’s not what I’d call inspiring news.

And this might be my favorite part of the so-called recovery: About 10.9 million borrowers are underwater on their mortgages, according to CoreLogic. That’s 22.7% of all U.S. homeowners. On top of that, another 2.5 million borrowers in “near-negative equity positions.”

Inevitably, we’ll bottom — that’s a fact.

But it won’t happen this year.

My colleague Steve Christ agrees with me. As does Adam Lass, who recommended the XHB September 2011 19 puts (XHB1117U19). They should be doing quite nicely as the underlying now trades just above $18…

xhb chart

So what’s the best way to trade the likely downside of housing even from here?

I still like the XHB September 2011 19 puts Adam recommended, but I’d also pick up the Lennar (LEN) puts.

LEN chart

Don’t Short; Buy Puts

I’ve written in depth on call options, news trading, and LEAPS options trading.

Today I’d like to take a look at why buying a put option for downside bets is much safer than shorting a stock outright.

While you can always short a stock, this investing style carries high risk. You’re borrowing shares from a seller and hoping the price of the stock falls. But if the price rises, you’re forced to “cover” your position by buying shares back at a higher price.

When you short a stock, you do so without actually owning it. Instead, you’re “borrowing” shares. Once you’ve “shorted,” you want the stock to fall so you’ll be able to replace the shares you borrowed at a lower price…

Your profit is the difference between the price at which you borrowed the shares and the buyback price.

If the stock rises, however, you’re in trouble because you’re now obligated to buy the shares at a higher price than you borrowed them.

There’s a better, safer way to do this: Buy put options.

I’ll give you an example: If you thought Research in Motion (RIMM) was headed to $20, you could buy the November 2011 $20 put here. You’re not borrowing anything. And you profit if it heads lower.

Options outperform stocks several times over — whether the market is going up or down.

In this turbulent market, I suggest learning how you too can line your pockets with options profits…

I explain all of this and more in my new instructional webinar.

Stay Ahead of the Curve,

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Ian L. Cooper
Analyst, Wealth Daily

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