This morning, we received more evidence that the U.S. housing market is improving and I'm starting to believe that we will in fact see a multi year recovery in housing, which of course bodes well for the financial sector, as well as the overall economy. The new housing permit numbers that were released this morning show that future demand for new houses is growing, and it also reflects homebuilders confidence in the overall direction of the housing recovery going forward. Now my thought of course was well how about the shadow inventory glut of foreclosed or empty houses that are currently sitting out there? Well as I wrote about several weeks back, the oversupply of these types of houses has been shrinking over the past several months, due in part to the fact that banks are starting to lend more, and interest rates are at historical lows (which lowers the overall cost of home ownership).
So, we are starting to see that there may be a viable multi-year recovery in the housing market, especially if we continue to see the economy muddle along with some bit of growth and especially if unemployment starts to tick down..the question becomes how do we translate this information into how we can make money off of our investments? Well, after doing some research yesterday, and talking with other money managers and market analyst, I expect the best way to play this recovery is going to be through the financials, both the regionals and the larger institutions. The reason I like the financial sector, as opposed to actually owning the home builders, is because banks are lending again, and therefore they will benefit from their gross margins expand as their improved loan portfolios grow. Some of the financials I own and believe are the best investments to own are:
Bank of America (BAC)
Synovus (SVN) - local southern regional
Citigroup (C)
Wells Fargo (WFC)
Hudson City Bancorp (HCBK) - local midwestern regional - pays a 4.7% yield
Chimera Investment Corp (CIM) - pays a 15% yield
I also think a good way to play this rebound is to own retail outlets such as Home Depot and Lowes, both of which stand to benefit as consumers (new homeowners and even those looking to fix up existing houses) spend more money at their stores. That being said, unlike the financials, which are still extremely undervalued, both Home Depot and Lowes stocks have performed somewhat well so it might be wise to wait for their share prices to pull back a bit.
In yet another positive sign for the U.S. economic outlook, the CFO of Goldman Sachs, which is one of the largest financial institutions in the world, said on their conference call early this morning that they were definately seeing signs of economic growth..and while they remain cautious, they were growing more confident in the slow but positive growth they are seeing.
