When Homebuilder Confidence Spikes Up, The Housing Market Collapses

Investment Research Dynamics

Although I never put much credibility in the Government’s housing starts report because the data collection is poor and the data that is collected is put through the Government’s statistics manipulation meat-grinder, today showed a stunning decline in housing starts vs. last month and vs. expectations.  The high volatility last month and this month was due to “reported” starts in apartment buildings.  The last time apartment starts reached a very high level was in 2005 – right before the housing bubble burst.

And yesterday much ado was made about the National Association of Homebuilders Confidence Index report.  It’s reached a level not seen since, well – 2005.  I put together this graphic below which happens to show what happens to housing starts and new home sales when homebuilder “confidence” spikes up like it showed in yesterday’s report (click on graph to enlarge):

As you can see, the last several times builder confidence spiked up, housing starts and new home sales fell off a cliff (2005, 1994 and 1990).  I remember the 1990′s housing market well because I was trading homebuilder junk bonds on Wall Street.  All of them junk bonds of the same homebuilders who nearly went bust in the late 1980′s and in 2008.

The fact of the matter is, the homebuilders had damn well better be confident because every single one of them is taking down piles of debt in order to build up their inventories to levels last seen in 2005.  Everyone I look at is doing this.  What’s completely startling about this is that, while homebuilder company debt levels and inventories are back to their 2005 levels, the overall sales volume for new home sales is ONE-THIRD the level being sold in 2005.

Hopefully you can see where this is headed because, right now, the homebuilder stocks are THE best short-sell opportunity in the entire market since the opportunity to short homebuilder in stocks in 2005 and tech stocks in early 2000.   Stunningly, the p/e ratios at all of these homebuilders are well in excess – as in multiples – of their long run average p/e’s and their p/e’s at the peak in 2005.

Here’s some facts about the ability of the average American to actually buy a home – this comes from John Williams’ Shadowstats.com, who sourced this information directly from a Government report:   1)  U.S. Economy Re-Entered Recession in 2013, Indicated by the BLS’s Annual Consumer Expenditure Survey;  2)  2013 Total Money Income Fell Even Before Inflation Adjustment.   If people are not earning money, they aren’t spending money.  If they aren’t spending money, they sure ain’t buyin’ homes.   That latter fact is confirmed by this year’s collapse in mortgage purchase applications.

There is a unique opportunity to make a lot of money shorting homebuilder stocks – either outright or via options strategies.  I have three reports which outline how to do this and why these companies are great short candidates here:   Homebuilder Research Reports.

Big institutions with big homebuilder stock positions (Vanguard, Black Rock, Putnam, Fidelity) have not begun to sell yet.  You want to be positioned ahead of their selling when the zombie spreadsheet jockeys at these firms figure out what’s really going on…