The following commentary is an excerpt from the latest issue of my Short Seller’s Journal. In addition to my analysis, I provide my subscribers with specific short ideas, including the use of options. In the housing sector, my recent home run short ideas include Zillow $Z, Opendoor Technologies $OPEN and Anywhere Real Estate $HOUS (formerly Realogy), among others.
Housing market update – There’s nothing like grass roots data from Main Street as opposed to the gaslighting propaganda from the perma-bullish mainstream media. A subscriber emailed me to tell me he talked with two window manufacturers. Anderson said they are down 60% in requests for quotes [from builders, primarily but also replacement window resellers]. A higher end company to which he spoke wouldn’t give him a number but did not argue when he mentioned the 60% number. Both companies are still working through their back-log of orders.
The mortgage purchase index last week dropped to 197.8. This is the fifth week in a row of declines. The index has fallen 10 of the last 11 weeks. Outside of the lockdown period, the purchase index is at its lowest level since late 2016. It has plunged 43% from its peak in early 2021. Note that the purchase index continues to decline despite that fact that 30-year mortgage rates slipped below 6% last week.
Recall that I’ve been discussing the record level of homes under construction by new homebuilders. This chart was posted on Twitter last week:
The number of housing units sitting in various stages of work-in-process inventory on homebuilder balance sheets is at an all-time high of 1.678 million – 50% of which is single-family homes. It’s 18% higher than the peak in the previous housing bubble. Homebuilders are beginning to release a massive backlog of finished homes on to the market at discounted prices.
According to the Census Bureau data, this is the first time in history that the number of single-family homes being built exceeds the run-rate of single family homes that are being sold. Note that the run-rate (SAAR) is declining and will continue to decline per the mortgage purchase index and pending home sales data.
In my opinion, the homebuilder/home construction-related stock valuations are significantly overvalued relative to the industry fundamentals and outlook.
The chart above from the Fed shows the single family new home sales monthly SAAR over the last ten years. The current level is back to where was in the 2015-2016 time period.
This chart is a 10-yr weekly of the DJUSHB (Dow Jones Home Construction index):
In the 2015-2016 time period, the DJUSBH was trading between 500 and 600 vs Friday’s close at 1,190. This means that home builder/home construction stocks are trading currently at two-times the value per home sold now as in the 2015-2016 period. This is despite the fact that mortgage rates (6%) currently are nearly 200 basis points (2%) higher than the average rate in 2015-2016 (4%).
To be sure, profit margins over the last year have been higher than they were in 2015-2016. But that’s “rear-view” mirror data. With inventory soaring and sales plus prices dropping, the profit margin differential will quickly disappear. In addition, in coming quarters homebuilders will be forced to take big inventory valuation write-downs. This fact is not remotely priced into the stock valuations yet. I am going to increase my capital allocation to homebuilder puts.
The homebuilder stocks have been holding up better than I would have expected given the significant decline in new orders that they have been reporting over the last couple of quarters. This is particularly true of TOL, which showed a 60% YoY drop in new orders in its latest quarterly report. I don’t expect this to last much longer. In fact, I expect home prices to begin to decline in step-function fashion, which what happens when a relatively illiquid market goes from a big demand imbalance to a large supply imbalance, as is happening now.
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