Bearish Housing Market Data – Homebuilders Headed For A Fall

On Wednesday the Census Bureau released its new home sales report and the National Association of Realtors released its Pending Home Sales Index.   Both data series missed Wall Street estimates by a country mile, with new home sales showing a slight gain over September and the Pending Home Sales unexpectedly dropping from September.  With regard to the reliability of the Census Bureau data, John Williams of explains:

A lack of stability continued with the Census Bureau’s headline monthly reporting of new-home sales in October…headline reporting remained extremely unstable. Sudden initial headline surges in monthly activity appear to provide no more than one-shot media hypes, which disappear with the next month’s revisions.

In other words, the Government’s estimates for new home sales is unreliable.  I’ve written a detailed analysis of the two reports which you can read here:   Seeking Alpha.

The bottom line is that the housing market is starting to slump at an increasing rate.  The homebuilders have surprised me with the tenacity of their short-squeeze move higher here, but it’s been fueled by the inexorable move to daily new record highs in the S&P 500.  The homebuilders, mind you, are not even at 50% of their all-time highs.

Furthermore, the homebuilders are now insanely overvalued.  Historically they have traded at 5-8x p/e, when they even produce “e” (“earnings”).   Currently they are trading at p/e ratios that, on average, are 2-3x historical norms, with some trading at even higher multiples.  For instance, Pulte Homes currently trades at an 18 p/e.   In 2005, at the all-time peak of the housing market, PHM traded at a 9 p/e.   A year later it was trading at a 5 p/e and short thereafter was not producing any earnings.

For comparative purposes, in 2005 PHM had $3.3 billion in debt on top of $1.5 billion in net income – 2x debt to income.   Currently it has $1.8 billion in debt on top of $140 million in net income – a 12.8x debt to income.

ALL of the homebuilders have ratios like this. The stocks are an absolute train wreck waiting to happen.   I have four great homebuilder reports which you can access here:   Homebuilder Short Sell Reports.

If you are already short, you need to add to your position.  If you have not shorted them yet but are thinking about it, my reports will convince you that it’s a great long term trade.  In each report I show how these builders are using highly misleading accounting to boost their GAAP net income (non-cash net income).  I also have a section in each report how trading/capital management strategies and using options to help manage your positions or replicate going short if you are not comfortable shorting stocks.

This is going to end up being the best sector to be short when the stock market finally capitulates and crashes.  Click to enlarge:


2 thoughts on “Bearish Housing Market Data – Homebuilders Headed For A Fall

  1. C’mon, dave, the future’s so bright you better get out the welding goggles lest u be blinded by the perpetual prosperity coming.

    this chart-hugger guy says walflower breaking out, clearly a super-strong signal considering the strong dollar.
    either that, or they just found a secret cache of walmartian shopper the exact opposite of the kind u see on that notorious site–solvent AND slim! LOL.

    The gap up on $WMT on Nov 13 now unquestionably appears to have been a breakaway or measuring gap. It is unlikely that a serious sell-off can occur in this stock. In fact, any weakness back toward $82 would be an excellent buying opportunity with a minimum target of $105.

  2. My relatives every time say that I am killing my time here at net, except I know I am getting experience everyday by reading such good content.

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