As we well know, the media and Wall Street have been pumping this idea, fraudulently, that the housing market is in recovery. As part of this bubble-blowing, the homebuilder stocks have run up to valuation levels that are higher now than at the peak of the housing bubble in 2005/2006.
All of them now have as much debt and inventory as they did back at the bubble peak on a current unit sales level that is 1/3 the level of peak bubble unit sales. It is beyond stunning. I know the hedge funds that are playing to the long side are all-in. In other words, the money that is available to move into the homebuilder stocks is already deployed. Now the hedge fund community needs to generate demand from retail investors in order to complete the “next greater fool” cycle. Perhaps this is why Jim Cramer was pumping three homebuilders on Mad Money last week: Cramer LOVES Homebuilder Stocks (link).
Anyone with a brain cell in their skull knows that Cramer has been mathematically proved to be THE best contrarian indicator in the stock market.
Since Cramer ignores all fundamentals in favor of pumping the stocks the hedge funds pay him to pump, let’s look at two perfect fundamental indicators.
First is the price of lumber, which is in virtual freefall – it’s down amost 3% today:
I got news for the housing market bulls, the price of lumber falls because demand for lumber relative to supply falls. If the price of lumber is falling like this – especially given that we’re being told that the economy is doing well – it means homebuilders are not buying lumber to build new homes. Note: a “housing start” does not necessarily mean a home is physically being built to be called a “start.”
Second: “Houston, look out below.” Aaron Layman is a real estate professional in Houston, focusing on Katy/West Houston. He has a blog in which he reports reality about the housing market down there. As it turns out, new construction sales in Katy/West Houston plunged 40% year over year. This is not because of bad weather. You can read Aaron’s work here: Aaron Layman
What is occurring in Houston is a signal for what is developing in the rest of the country. It’s not the “bad weather, dog ate my homework” theory floated by Wall Street. If bad weather was causing the price of lumber to drop, we should be seeing a bounce now. In fact, according NOAA, the month of March was warmer than normal over most of the country.
The economy is beginning to deteriorate at an accelerating rate. Every day the stock market is pushed higher by the Fed, it becomes more dislocated from reality. The homebuilder stocks are more dislocated from fundamental reality now than they were at the peak of the bubble. When downside reality grips the stock market, it will be particularly brutal on the homebuilder stocks.