The Brexit picture is getting muddier by the day.
Everything from a quick process to another referendum to nullify the first one have been proposed.
The only certainty is that no one knows how this is all going to play out.
If you look at the markets, you’d think the Brexit vote was going to lead to a Venezuelan death spiral and it’s only a matter of days until roving mobs take over the food supply and toilet paper prices soar 10x on the black market.
It’s not that bad. It won’t be that bad. And one of the most beaten up sectors of UK stocks will stage an epic recovery.
From Worst To First
For those looking to do some bottom fishing in the UK stock market, look no further than housing stocks.
The UK’s housing market has ground to a halt the day the Brexit was approved.
Some research firms are estimating housing sales could drop 20%.
A spokesman for Chestertons, a London real estate agency, told the Financial Times buyers were walking away from deals and one of it’s agents “lost three deals in a little over an hour.”
Undoubtedly, there’s going to be a hit to UK real estate. Any drop in demand will surely lower prices.
However, the question is, how much of a hit will it take?
Looking back to the UK housing market during the credit crisis provides a good guide.
Between 2007 and 2008 annual housing starts fell from an annual rate of 50,000 to about 17,000.
That 66% drop in demand coincided with a 20% decline in average housing prices.
If that 66% drop in demand led to 20% drop in prices, what would you expect a 20% drop in demand lead to?
About 5% would be a fair bet. Maybe even 10%. Even the worst case would be 15%.
It’s not nearly as bad as the housing meltdown and global financial crisis.
However, the markets are reacting as if it’s worse.
The UK homebuilder and Real Estate Investment Trust (REITs) have gotten crushed in the past two days.
Eight of the top ten biggest losers on FTSE 250 (which is the UK equivalent of the S&P 500) are homebuilder and real estate stocks.
Crest Nicholson (London:CRST) dropped 41%. Derwent London (London:DLN) has shed 35%. Bellway (London:BWY) is off 34%.
Others including Bovis, Grafton, and Great Portland Estates have all lost a third of their value too.
Like Buying Oil For $26 A Barrel
In the end, the situation is a simple one.
The UK’s housing market is headed for a recession.
Meanwhile, it’s housing stocks are trading like it’s heading for a depression.
We’ve seen this situation before though where there’s a sharp drop in a sector of stocks followed by a panic-driven undershoot.
The most obvious example was oil.
At the time of the oil sell off, your editor estimated the fair value of a barrel of oil between $30 and $55 a barrel.
It fell steadily from $100 down to $80. Then $60. Then $40.
Then it recovered briefly a couple times, but eventually the bottom fell out and oil prices “undershot” the reasonably expected price range based on production costs, supply, and demand.
That’s what may well happen to UK housing and real estate stocks.
The sharp drop is here for UK homebuilder stocks. Another big downswing should create an excellent buying opportunity.
You’ll know it’s time to buy when you don’t want to buy at all.