How Real Estate’s Non-Recovery Can Be a Good Thing

Now more than a full year into the market recovery, and at least a few months into the (so far unofficial) economic recovery, one thing has become pretty clear…. the real estate market isn’t participating in the rebound process. Yet, there’s a rebound - of sorts – in the house and home arena.

How does that happen, and more importantly, which stocks are the victims and the beneficiaries of the mixed recovery?  The numbers say it all.

No end in sight: It’s actually quite astounding when you think about it. The bulk of the reason interest rates have plunged to practically nothing, and the reason the federal government has put the pressure on lenders to make credit available, was to stimulate the housing market. Yet, this is one area that still struggling despite life support.

In February, home sales fell to an annual rate of 5.02 million units – well off November’s annualized peak rate of 6.49 million. Worse, the median sale price dipped to $165K, which is just a hair above a multi-year low. New home sales in February were even less impressive, hitting a multi-tear low sell rate of 308,000 units annually.

In other words, despite the optimism, there’s no real evidence that real estate is rebounding. If it were just one piece of data or another, that could be dismissed as a fluke. When all the data is aligned though? That’s a trend.

At the bottom of the pile: Though tepidness in existing home sales doesn’t inherently hurt homebuilders, it sure doesn’t help any…. not that the weakness in new construction was in question. Fewer new homes were sold in February than in October of 2008 – the heart of the credit crisis.

Clearly this continues to be bad news for homebuilders such as PulteGroup (NYSE:PHM), Toll Brothers (NYSE:TOL), and KB Home (NYSE:KBH), just to name a few. Though most stocks in the industry have seen sharp gains over the last few months, few (if any) can actually justify those moves – particularly in light of February’s sales stats.

The alternative to a new home: The growing availability of credit paired with low interest rates should stimulate the real estate market, but it’s not. Oh, consumers are spending money again, but they’re spending it on upgrades of their current homes, rather than on new houses.

As evidence, look at home-décor retailer Kirkland’s (NASDAQ:KIRK) numbers from last quarter… a 7% increase in sales, and a 47% increase in profits. Bad Bath & Beyond (NASDAQ:BBBY) has grown its top and bottom line in its three prior quarters; investors can probably expect to see a fourth earnings ‘beat’ come April 7^th.

That home-spending trend is likely to carry into 2010 as well, according to Ethan Allen Interiors’ (NYSE:ETH) data. The company’s orders for January and February were ahead of 2009’s numbers by a solid 25%.

No lines to read between: The numbers pretty much speak for themselves…. consumers are spending again, looking to improve their homes in ways that don’t include a new mortgage. That’s a trend/disparity that’s not apt to end soon, with clear investment implications.