Yesterday I got a lot of “WTF?” inquiry about the spike up in the homebuilders despite the market sell-off. I have been saying all week that the homebuilders are spectacularly over oversold and are due for a bounce. They typically will rally into the NAHB homebuilder sentiment report and the housing starts report, the latter of which is released tomorrow. Yesterday’s spike up was based on what I just described plus the remarkable plunge in the 10-yr Treasury yield, which at one point was below 2%.
I got news for the housing bulls, lower interest rates are not stimulating sales. Today’s homebuilder sentiment index showed an 8.5% drop from last month and it was well below the lowest Wall Street estimate (56 to 61). Most notably, the foot traffic component plunged from 47 to 41, with anything below 50 measuring a marked pattern of declining foot traffic. Bloomberg’s color commentary on the report said this:
The drop this month in interest rates isn’t driving up demand for housing, based on weekly mortgage bankers data for purchase applications and on the housing market index from the nation’s home builders which is down 5 points to 54. Lack of traffic points to lack of interest including lack of interest from the important group of first-time home buyers
Bloomberg always has a positive spin on the housing data. But not today.
Sales are going lower from here. We are in a long term secular bear market and the market – aided by several trillion in Fed and Govt stimulus, achieved a small dead cat bounce in the context of the bigger trend going on. Employment as a percent of the working age population is at historical lows and those who are employed are back to the 1994 average earnings levels. There is no organic economic support for the housing market.
The homebuilder stocks are a phenomenal shorting opportunity. By the time this over, at least half of them will be bankrupt because of all of the debt they’ve taken in the last 24 months and the ones that survive will be trading well under $10.
The stock of the company in my latest is a little lower than when I first published the report on October 1 (i.e. those who bought it the next day and shorted this stock are in the money already). But yesterday’s spike up homebuilder stock prices has given us an opportunity to start building, or adding to, a short position in this stock. You can access this report here: Homebuilder Short-Sell Reports.
In this report I go into detail on why this company is in worse financial shape than at the peak of the original housing bubble and how it uses a significant of misleading GAAP accounting gimmicks in order to deceive the casual investor or stock analyst.
While I think the DJUSHB homebuilder index may bounce back up to its 50 dma, thereby relieving the technically oversold condition, now is a great time to establish shorts. In my report I offer both capital management/trading advice and I have specific options strategies outlined for this stock.