In the context of the absurdly misinterpreted and highly manipulated housing data released so far this week, the Dow Jones Home Construction Index is down nearly 3% from its high print earlier this week, despite the fact that the S&P 500 and the Dow are up close to 2% this week. The nation’s third largest new homebuilder, PulteGroup, is down 9% from its high-tick earlier this week, after reporting at 6% year over year decline in unit home closings (deliveries).
While I’ll have a complete dissection of yesterday’s existing home sales statistical abortion released by the National Association of Realtors and gleefully delivered by its cross-eyed, dim-witted chief “economist,” Larry Yun, I wrote an article for Seeking Alpha in which explained why the housing starts report is completely useless as an indicator of activity – healthy or otherwise – in the housing market: The Housing Starts Metric Is Useless
In fact, despite the ebulliently presented headlines, single-family housing starts showed a definitive, statistically significant decline for September from August. This is the metric that, if it even had any relevance, would pertain to the extreme overvaluation of the homebuilder sector.
While it’s extremely difficult to short anything in this market, the homebuilder sector is going to hit a wall of reality that will trigger a big sell-off in the sector. I believe we are seeing the start of that this week. My latest report delivered 9% to those who purchased it when I published it earlier this week – more if anyone played the near-money, October puts. There’s still significant room for this stock to go well below $10 eventually. You can access my report here: Homebuilder Research Reports.
[Please note: Five of my homebuilder stock reports have not been updated with recent earnings for quite some time. The date listed above each report is the date of the last update. I am offering these reports at a discount if you purchase multiple reports. Anyone who buys my reports can receive updates as part of the price of my reports. Please contact me at this EMAIL address if you are interested in all of my reports. Once I update them with current financials. they will only be available at full price]
Like Toll Brothers, DR Horton released impressive earnings. I can’t figure out who is buying those homes given that mortgage applications have been declining almost every week (93% of all new homes are bought using a mortgage). Perhaps a lot of the newly-minted part-time employees working 2 jobs per the latest Government report have amassed enough cash to pay for these homes outright…I would suggest that DR Horton has taken market share from competitors like KB Home and HOV.
However, an in-depth analysis of DR Horton’s financials shows trouble brewing beneath the surface. My article posted on Seeking Alpha goes into details:
With its current level of debt, DHI is making a bigger bet on the direction of the housing market now than it had been making during the housing bubble years.
You can read the entire article here: LINK.
A colleague of mine who is also short the homebuilders sent me this quick email message: “Bit of a squeeze in the homebuilders. Looks like a last gasp.” Although I underestimated the height of this latest bounce in the DJUSHB, the MACD/RSI momentum indicators are now extremely overbought.
Now is a great to short these things, especially if you are establishing a new position. And because this is a volatile sector prone to short-squeeze runs, I’ve been very clear that about recommending always starting with partial positions and saving capital in case the stocks squeeze higher after you start your short position. Now is also a great time to add.
All four of my homebuilder short ideas are great plays after this latest move (before this move I had recommended holding off on shorting the company in my July 30 report because it was getting very oversold and close to $10. You can access my reports here: Homebuilder Short-Sell Reports.
A colleague of mine who has a second residence in Arizona told me today that he received a card in the mail from Toll Brothers. TOL was offering to reimburse up to $2,000 in travel expenses if the person receiving the card bought a new home in Arizona. Toll must be getting desperate because the only way to get the information needed to mail my colleague was to physically go make copies of the property tax rolls at the County admin offices. He said he had not seen something like this in the 15 years he’s owned a home in AZ.
This is in addition to the massive amount of incentives that these new homebuilders are already offering: free pools in warm States, price discounts and other “value-added” incentives that these companies are throwing in to try and move homes. This is in addition to the fact that they underwrite most of their own mortgages, which enables them to build in subsidized financing.
The housing market is deteriorating quickly, along with the rest of the economy. I wrote an article for Seeking Alpha which documents several confidence/outlook indicators which reflect the rapid deterioration in the underlying fundamentals. You can access that article here: Housing Market Update: It’s Getting Worse.
The homebuilders have staged a bounce along with the rest of the stock market, although this bounce has been primarily driven by declining volume. The S&P 500 and Dow continue hit new all-time highs but the homebuilders can not even bounce back to recent highs. This tells us that the market is starting to understand just how quickly the fundamentals for housing are fading.
Every single one of my new homebuilder short reports are still valid. You can access those reports here: Homebuilder Stocks: Why They Are Great Shorts.
The stock market is bounding higher on Fed hot air and unbridled investor optimism. The hot air will eventually get cold and the optimism, in my opinion will soon fade. The risk in this market is to the downside. In case no one noticed, Ukraine is heating up again and the Middle East gets more violent by the day. The recent economic reports, rigged and manipulated as they may be, show a U.S. economy that weakens by the day.