For Immediate Release
Chicago, IL – May 5, 2010 – Zacks.com Analyst Blog features: Wal-Mart (WMT), USG (USG), Plum Creek Timber (PCL), Berkshire Hathaway (BRK.B) and Fortune Brands (FO).
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Here are highlights from Tuesday’s Analyst Blog:
Pending Home Sales Moving Up
The rise is most likely due to the homebuyer tax credit that was granted only for homes under contract by the end of April, and which have until the end of June to close. Last fall, it was widely expected that the tax credit would expire, but it was unexpectedly renewed at the last minute.
The result was a big spike in existing home sales, followed by a big hangover. The first wave seems to have taken care of much of the pent-up demand, even though the deal was actually sweetened to hand out tax credits not only to first-time buyers, but to buyers of existing homes moving to a new place as well.
This was a total waste of money, in my humble opinion, since it does nothing to absorb the excess supply. While credits to first-time buyers are more justifiable, they are still an expensive proposition, with much of the money going to people who would have bought homes anyway.
However, since when a transaction is subsidized the benefits tend to be split between the buyer and the seller, the tax credit has helped — at least temporarily — to stabilize home prices. The benefit to the buyer shows up on their tax returns, the benefit to the seller shows up in a higher selling price.
The higher prices have prevented many homes from slipping below the amount of the mortgage on the house. When a house is “underwater,” foreclosure becomes more likely. Indeed, if a house is not underwater, there should never be a foreclosure, since simply selling the house would be a better option for the (soon to be former) homeowner than simply handing it over to the bank, regardless of the homeowner’s cash-flow situation. This housing wealth effect was probably more important than the higher transaction level in stimulating the economy.
In other words, while the rise in pending home sales is nice, don’t read too much into it, since it is not likely to last. Also, we are talking about used home sales here, not new home sales. Each new home sale creates a vast amount of economic activity. It produces employment for the framers, the people hanging the dry wall and putting in the plumbing. Those people will go out and spend the money, which will benefit Wal-Mart (WMT) and other retailers.
A new house uses a lot of resources like timber, Gypsum board, cement and bricks, which benefits a wide range of firms ranging from USG (USG) and Plum Creek Timber (PCL) to Berkshire Hathaway (BRK.B), which among other things is one of the largest suppliers of bricks and paint in the country. Makers of plumbing fixtures and kitchen cabinets like Fortune Brands (FO) also benefit.
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