Housing Still Hasn’t Hit Bottom

BREAKOUT By Jeff Macke May 19, 2011

Housing bulls have wanted to get bullish ever since the bubble popped in 2008. They better grab a chair because it’s going to be a while, according to Richard Suttmeier. The chief market strategist of ValuEngine.com says home prices simply aren’t going to bottom no matter what the government or banks may do to push them higher.

Suttmeier, whose firm uses a blend of technical and fundamental analysis to drive its investment recommendations, offers some discouraging data for contrarian housing bulls. Housing prices haven’t just been “correcting” in the context of a recovery, observes Suttmeier. Housing actually never recovered in the first place. The economic truth of supply and demand is in play; during the bubble years we simply built way too many houses, and the glut isn’t going to be worked off anytime soon.

None of which is particularly new information for those paying attention to Federal Housing Finance Agency data or watching the S&P/ Case-Shiller Home Price Index approach the 2009 lows. What is of note are the investment conclusions Suttmeier reaches based on this and other observations. He says the bad mortgage problem still exists for regional banks in particular and that foreclosure rates would be much higher were it not for the fact that it’s often less expensive to allow people to stay in a home than it is to evict. After the federal bailout the regional banks are, in many cases, left holding the housing bag, stuck with massive inventory of homes that need to be sold off to a market with no demand.

By extension Suttmeier says companies such as Caterpillar (CAT), which has been on a torrid run of late, are poised for a fall. When my partner Matt Nesto observes that an enormous percentage of CAT’s revenues come from foreign sources, Suttmeier says emerging markets are following close behind the U.S. in the creation of a capacity glut. This echoes the observations of Vitaliy Katsenelson, who last week asserted that the Chinese government has resorted to building massive and unoccupied “ghost towns” in order to keep up the appearance of growth.

Suttmeier is also in the Breakout camp in keeping an eye on the recent drop in copper. He says the leading economic indicating metal dropped below its 200-day moving average on May 11 for the first time since July 2010. This is a warning, according to Suttmeier, that the global recovery is sputtering.

Before dismissing Suttmeier as a perma-bear, please note that he’s a truly agnostic strategist, simply following the lead of his proprietary screening methodology, which follows 5,500 stocks. When the fundamentals flash a warning sign, he plugs in the technical and other observations to arrive at his conclusions. This system has proven prescient in the past for Suttmeier’s clients, who were warned about bank stocks in 2007. This was early enough to be actionable, which is distinct from the countless number of bears who “saw the housing market bubble coming” well before such an observation made, or saved, them money.

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