This from Today’s Financial News:

It is a fact that the real estate industry has historically been a leading indicator of the American economy. When it falls, Wall Street falls. When home prices rise, so does the Street. If that continues to be the case, the American economy is on the rebound.

For proof, look at today’s new-home sales figures released by the Commerce Department. Compared to sales in August, the amount of new homes that sold in September rose by an unexpectedly high figure of 2.7%.

Over 464,000 freshly built houses traded hands across the country. Three years ago, that number was nearly three times higher. But that is all in the past. What matters is that this month’s figure marked an end to the real-estate landslide.

So what has caused buyers to return to the markets? Two things, falling prices and fear of the stock market.

As for falling prices, take a look at these figures. One year ago, the average new home sold for $240,300.  Right now, that figure is just $218,400.  Buyers smart enough to realize home prices are not going to drop any further are getting an instant 10% discount on their homes.

Next, there are plenty of folks unwilling to take a leap into the stock market right now. With the nation facing a deep recession, the equities market is a scary beast for the uninitiated. They figure if they invest in real estate, their investment will always hold at least some value. After all, a piece of land cannot go bankrupt and disappear overnight. Smart idea. Instead of burying their money in their backyard, they are making it work for them.

News you can use

Even with the strong selling last month, inventory levels are still near record-high territory. Over 390,000 new homes remain unsold across the country. According to the experts that calculate such things, that is a 10.4-month supply. Inventories dropped by over 7%.

With prices falling and such a high inventory of homes still on the market, few builders are willing to raise a new house unless it is already sold. That simply means the market is correcting itself and the free economy is working.

As long as the government stays out of the industry, it should recover in short order.

So where is the investment potential? It depends on how much you have to invest.

If you have plenty of cash and have access to the markets along the western coast, buy all the deeply discounted properties you can afford. Rent them now and sell them in a few years. Your investment will pay off handsomely.

If you don’t have a few hundred thousand dollars lying around, you can reap equally large gains by investing in a few choice real estate investment trusts (REITs). Trusts like Post Properties (NYSE:PPS), which is involved in apartment rentals and condo sales, and American Campus Associates (NYSE:ACC), which is taking advantage of the shortage in student housing and a real-estate industry bottom, will do well. And just as almost all REITs do, they both pay nice dividends of 9.7% and 5.5%, respectively.

The facts are obvious. The real estate market is turning around, proving the American economy will be on the rebound fairly soon. We have seen the worst of this crisis.

Now is the time to re-allocate your portfolio and ensure you are properly positioned to take advantage of the bull that lies just over the horizon.

Source: Last Chance for Deep Discounts In Post Properties (PPS) and American Campus (ACC)

As a result, Toll Brothers’ stock gained a handy 3.44% by mid-afternoon in Tuesday trading as investors viewed it as a signal that the U.S. housing slump has more yesterdays than tomorrows.

The largest U.S. luxury homebuilder posted a net loss of $93.7 million, or 59 cents a share, in the quarter ended April 30 with a $36.7 million, or 22 cents a share, profit a year earlier.

This quarter’s loss is technically related to write-downs and land value of a joint venture, but overall blame goes to the stagnant U.S. housing market.

“In this difficult market, we continue to develop incentive strategies, when appropriate, on a community-by-community basis, which has enabled us to continue to generate pre-write-off profits,” Robert I. Toll, chief executive officer, said in a statement. “Although this strategy has resulted in slower sales, we believe it has helped sustain the reputation of our communities and value for our home buyers.”

Toll didn’t stop there. He bluntly went on to suggest ways the U.S. Government can quicken the housing market’s recovery – the key of which is removing the danger from existing homeowners who worry about selling their homes, and in turn, wait to buy a new one.

“We believe Congress should jump-start demand for new homes with an initiative that will bring buyers off the sidelines and into the market, and thereby stop the downward spiral of home prices. As we have said before, we favor a tax incentive for all those who buy homes within nine months of the Bill’s passage; this would create a sense of urgency. Interest rates are low, supply is abundant and a buyer’s market prevails. With a little motivation, the new home market could turn around, which would have a very positive impact on banks, bond prices and many other areas of the economy. Once home prices stabilize, Congress could then more successfully address mortgage issues; however, without stabilization of home prices, trying to address mortgage issues may be difficult at best,” Toll said.

Fittingly, “new homes” are exactly what Toll Brothers make and sell, but he makes a point.

For the first quarter, Toll Brothers posted its first loss in 21 years.

Toll Brothers made significant steps forward by reducing its risk at the source – shedding its land holdings from 91,200 in the second quarter of 2006 to its current number of 51,800.

The company also cut its net-debt-to-capital ratio from 31.8% a year ago to 22.7%.

“This liquidity will allow the company to take advantage of opportunities that arise from less financially flexible peers as we move through the downturn,” UBS AG (UBS) analyst David Goldberg told Reuters, calling Toll Brothers a “buy.”

Source: Toll Brothers Banks Lower Loss, CEO Gives Congress Some Market Recovery Advice

“It’s the economy, stupid.”

And it was economic worries that were on the minds of most voters who entered the polling booths yesterday. Those on low-incomes had recently been hit by the scrapping of the 10p tax rate. Those better off have the memories of Brown’s stealth taxes. And, of course, the ever-present credit crunch is making all of us nervous.

Where now for Gordon Brown? If he leads Labour into the next general election, Labour will lose. That certainly seems to be the opinion of many in Brown’s own party.

Call me a conspiracy theorist, but I reckon Labour backbenchers deliberately bided their time on the 10p tax issue. Brown announced it last year in his final Budget as Chancellor. But it was only once it came into force — conveniently one month before elections — that the rebels kicked up a stink.

Few MPs in marginal seats are looking forward to fighting an election under the Flag of Gordon. They know that the struggling economy will give opposition parties some priceless ammunition over the next couple of years. Brown can’t really duck those bullets — he was Chancellor for ten years.

Expect further dissention in the Labour ranks. In fact, the only people who stand to benefit from Brown’s continued premiership are the Conservatives. If they’re clever they’ll keep the pressure on Brown moderate enough that he stays on.

But if he wants his party to stand a chance of retaining power, he won’t. The only reason he might stick around is if he’s extremely stubborn.

Oh.

Who will build those 3 million houses?

The Government has grand plans to build 3 million new homes by 2020. Trouble is, who’s going to build them? And if anyone does want to, will they be allowed to?

Today we read that private housing orders during the first quarter of the year were 29% down on those in the same period last year. The construction industry, as everybody knows, is in a slump. Homebuilders are building fewer houses.

I’ve said this before about mortgage lenders, but the same applies to homebuilders: private businesses make decisions based on what’s best for them. Not to hit some government target.

This is how it should be, of course. This is capitalism.

Recommended

—FLEET STREET LETTER ALERT—

3 “Gloom-Loving Stocks” for the Coming Recession

Dark clouds are gathering over the UK economy.

But for contrarian-minded investors, this spells opportunity.

The Fleet Street Letter has just been given permission to share three such money moves with you today.

You can read the full briefing here.

Forecasts are not a reliable indicator of future results. Your capital is at risk when you invest in shares, never risk more than you can afford to
lose. Please seek independent financial advice if necessary. Fleet Street Publications Ltd. Customer Services: 0207 633 3600.

So at some point this policy will probably be quietly ditched. But as I’ve noted above, Gordon Brown may not be at the steering wheel for that particular U-turn.

What went wrong with Exxon?

On Tuesday Garry White wrote about the “earnings surprise” gravy train. Oil analysts are consistently underestimating the oil price, which means they also underestimate oil company profits.

This has created a great investment opportunity.

But yesterday ExxonMobil announced that its profits had missed consensus. That is to say, they were less than analysts expected.

So does that mean Garry was wrong?

“No,” says the man himself. “This says more about Exxon as a company than it does about the sector. This gravy train is still on the rails, my friend. Choo choo!”

Find out why a defiant Garry says: “There’s nothing wrong with my assessment!”

China’s next big investment…

As we all know, China’s growing rapidly. But to achieve this, it needs raw materials.

And where better to get them than mineral-rich Africa?

“This deal will net the Chinese up to 10 million tonnes of copper, and 400,000 tonnes of cobalt,” says an excited Manraaj Singh. “Not to mention how much it could make investors who get in now!”

Find out where Manraaj believes the next multi-billion dollar Chinese investment bomb is about to land…