Home Builders Peaked Here
As an economic prognosticator, I’ve often been early with bold contrarian and always independent and unbiased views, but not often wrong. In early 2011, I saw the set-up for a housing stock rally, and I issued a call to back up the truck for the industry’s shares. However, I backed away from that call late in the year, admittedly leaving a lot of profits on the table for those who may have been following along. My reasoning for the withdrawal was macro-driven, as I do not like what I see developing globally on many fronts. Briefly, I must disclose that my less than prosperous near-term view for the U.S. economy is based on: the impact of European economic recession (20% of U.S. exports) spreading beyond its borders; a less than helpful if not destructive effort from Washington D.C.; a dangerous circumstance of misplaced power in the hands of just recently negligent rating agencies; stubborn unemployment despite what the government is reporting; and a long-concerning and finally occurring Iran event. Over the longer term, I have great concern about the value of fiat currency globally and also geopolitical stability.
While I liked the setup still for housing stocks when I made that early call, I just could not (and cannot) see our economy, which is of course tightly tied to housing, avoiding the significant stumbling block being laid before it today. The economic data we’ve seen reported over recent weeks has contrasted with the modestly hopeful reports seen through the holidays, and housing data has been notably negative of late, in my view.
The latest bit of bad news came on the pricing front. Standard & Poor’s with Case Shiller reported their Home Price Index for November at the close of January. The index’s 20-City Composite and 10-City Composite both showed 1.3% month-to-month price decline, though seasonal factors certainly came to play. On a seasonally adjusted basis, the 20-City Composite still fell 0.7%, and that was worse than economists foresaw, given their consensus forecast for a 0.4% drop, based Bloomberg’s survey. Another good measure of prices which removes seasonal issues comes through the comparison against the prior year. On that scale, the 10 and 20-City composites posted -3.6% and -3.7% declines against the prior year period. This is not indicative of a recovering housing market.
The housing hounds will tell you that the data measured was old, and that the spring selling season might finally show progress beyond unique individual market segments. Take note that this is the essence of speculation. Long hopefuls have looked toward the seasonal opportunity every spring, and though it’s true that eventually we’ll have a good season. I’m just not seeing it happen in a big way this year, given the economic and other developments that are clearly unfolding.
The unemployment rate was reported lower for January. In the past, I’ve pointed out the weaknesses of this data point. While many of the usual issues likely remain, real improvement is also likely occurring. There are demographic factors playing into the participation ratio decline, and it’s also likely that the red tape of the process of getting or keeping government benefits are helping to reduce the unemployment rate but not helping folks nor the economy. Long-term unemployment remains excessive and too many Americans are working part-time jobs instead of full-time. Still, economic growth spurs demand for employment, and eventually, despite long-term productivity gains that have made many jobs irrelevant, we were going to have to see demand for people improving.
However, it’s not today that I’m worried about, but tomorrow. I see the hiring trend coming under pressure as we move forward. With 20% of American exports selling into the depressed European market where recession appears to be taking hold, there will be weight to bear by our economy. The last thing our vulnerable economy needs today is a setback like Europe, and the crisis remains at risk of expanding and exploding.
Secondarily, and less predictably, an Iran event has never been more likely than it is today. Most seasoned investors will tend to discount the geopolitical event against the fact that very few such happenings have disrupted the American economy. I would beg to differ though, while pointing out the “Saddam Selloff” of the early ‘90s, and noting that Iran is a much greater tinderbox with its crosshairs already attuned to U.S. interests across the globe. Also, some will say this is impossible to predict and must be left out of the equation. I disagree once again, and argue that such trivializing is both negligent and dangerous to capital interests. While too many will blow this factor off today, I point out that notation of facts with regard to the developments around Iran clearly indicate that the probability of a messy war is increasing almost on a daily basis now.
With this kind of scenario playing out, why would cyclical sectors be a wise destination for capital, outside of that allocated to day trading? And so, I reiterate that it is not today which is guiding my decision, but tomorrow that I’m planning for. With that said, money still moved into the homebuilders for reasons I outlined in my article early last year. Stocks, especially well beaten cyclical ones with cheap valuations, tend to precede operational gains. The current economics of housing remain horrible, whether we measure builder sentiment, home prices, New Home Sales (fell in December), Housing Starts (fell in December) or Pending Home Sales (dropped in November). Yet, the housing stocks are still acting as if the data has its modest positive tone that preceded the latest releases, based on some interpretations.
The SPDR S&P Homebuilders (NYSE: XHB) is just pennies off its 52-week high of $20.39, with the latest lift coming off the monthly employment report. Toll Brothers (NYSE: TOL) likewise marked its high last Friday on the jobs data. In fact, homebuilders K.B. Homes (NYSE: KBH), PulteGroup (NYSE: PHM), D.R. Horton (NYSE: DHI), Beazer Homes (NYSE: BZH) and Hovnanian (NYSE: HOV) are all trading at or very near their 52-week high, with for most, important gains coming over the last several months. The money is still running into homebuilders obviously, but I believe this is precisely the moment to reconsider. For some, money is already leaving, with NVR (NYSE: NVR) and Comstock (Nasdaq: CHCI) off 52-week highs recently touched. I think this is a sign of an exhausted run. Some investors are now waiting for a strong sign of real estate market recovery. If, in its place, an economic stumbling block presented itself, I would expect the sector would deflate swiftly. The risk, at this point, seems especially weighted against long positions. I would exit long positions and consider taking a relative short position on the most volatile and sensitive of names, or the XHB to reduce company specific risk.
Editor's Note: Article should interest investors in Investors Title (Nasdaq: ITIC), Bank of America (NYSE: BAC), Freddie Mac (OTC: FMCC.OB), Fannie Mae (OTC: FNMA.OB), Goldman Sachs (NYSE: GS), Morgan Stanley (NYSE: MS), Wells Fargo (NYSE: WFC), Toronto Dominion (NYSE: TD), UltraShort Real Estate ProShares (NYSE: SRS), Ultra Real Estate ProShares (NYSE: URE), ING Clarion Global Real Estate Income Fund (NYSE: IGR), Xinyuan Real Estate Co. (NYSE: XIN), Rydex Real Estate Fund H (Nasdaq: RYHRX), T. Rowe Price Real Estate Fund (Nasdaq: TRREX), Toll Brothers (NYSE: TOL), Hovnanian (NYSE: HOV), D.R. Horton (NYSE: DHI), Beazer Homes (NYSE: BZH), Lennar (NYSE: LEN), K.B. Homes (NYSE: KBH), Pulte Homes (NYSE: PHM), NVR Inc. (NYSE: NVR), Gafisa SA (NYSE: GFA), MDC Holdings (NYSE: MDC), Ryland Group (NYSE: RYL), Meritage Homes (NYSE: MTH), Brookfield Homes (NYSE: BHS), Standard Pacific (NYSE: SPF), M/I Homes (NYSE: MHO), Orleans Homebuilders (AMEX: OHB), Vanguard REIT Index ETF (NYSE: VNQ), PNC Bank (NYSE: PNC), J.P. Morgan Chase (NYSE: JPM), Hooker Furniture (Nasdaq: HOFT), Ethan Allen (NYSE: ETH), Pier 1 Imports (NYSE: PIR), Williams Sonoma (NYSE: WSM), Home Depot (NYSE: HD), Lowes (NYSE: LOW), Nasdaq: XNFZX, Nasdaq: FSAZX, Avatar Holdings (Nasdaq: AVTR), Apartment Investment & Management (NYSE: AIV), Equity Residential (NYSE: EQR), Avalonbay Communities (NYSE: AVB), UDR Inc. (NYSE: UDR), Essex Property Trust (NYSE: ESS), Camden Property Trust (NYSE: CPT), Senior Housing Properties (NYSE: SNH), BRE Properties (NYSE: BRE), Home Properties (NYSE: HME), Mid-America Apartment (NYSE: MAA), Equity Lifestyle Properties (NYSE: ELS), American Campus Communities (NYSE: ACC), Colonial Properties (NYSE: CLP), American Capital Agency (Nasdaq: AGNC), Sun Communities (NYSE: SUI), Associated Estates (NYSE: AEC), PennyMac Mortgage (NYSE: PMT), Two Harbors (AMEX: TWO), Simon Property Group (NYSE: SPG).
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