Homebuilder Update (Start Shorting Again)

The homebuilder stocks had a steep sell-off that occurred the week of October 6.  It culminated a move lower that started the first of week of July when the Dow Jones Home Construction Index (DJUSHB) topped out at 520.  From that top to the low of 428 on October, the DJUSHB dropped 17.6%.   In that same time period, the S&P 500 dropped only 2%.  There’s a message there…

By the end of the week of October 6th, the DJUSHB became extremely “oversold” from a technical standpoint (I’m using the RSI and MACD).  I have asserted on this blog that the homebuilders were due for a violent technical bounce and that they usually rally during the period in which homebuilder sentiment and housing starts are published.  This move was further fueled by a plunge in interest rates over the last week which took the conventional base-case 30-yr fixed mortgage rate below 4%.   I reiterate:  lower interest rates are not stimulating home sales.

This morning NVR reported its Q3 earnings this morning and that seemed to juice the homebuilder stocks, for some insanely idiotic reason.  NVR reported $20.70 per share but this missed Wall Street’s forecast of $21.46.    Revenues were up only 1% vs. Q3 2013, which means unit volume declined because the average price per home was up 4.8%.  Lo and behold, delivery volume declined from Q3 2013 to Q3 2014 by 3.2%.  I think the market drooled over the NVR’s reported 23% increase in “orders.”  However, note that the cancellation rate jumped from 13% to 16% year over year.  Essentially cancellations will offset “orders,” which is why deliveries dropped year over year.  One last point, NVR bought back shares, like every other large, GAAP accounting manipulating company.   If NVR had not bought back shares, its earnings per share would have been $19.20, which would have missed consensus forecast by a whopping 10.5%.

Please note that NVR caters to the upper middle and high-end homebuyers and is primarily concentrated in the mid-Atlantic region, which is where Washington DC’s taxpayer and Wall Street lobbyist largesse is being spread in copious quantities.  While NVR is extremely overvalued, it has a very low open market share float and, for some reason, has never offered options to trade.  It is a highly manipulated stock with very low liquidity and it’s difficult to trade.

At any rate, I wrote an article on Seeking Alpha which further discusses the deterioration in the housing market fundamentals.  You can read it here:   Housing Market Fundamentals. 

Three homebuilders report on Thursday this week. One of them is the Company in my latest homebuilder report.  I published that report on October 2, and the price is  a bit higher now than when I published.  But all three of the other homebuilder stocks are well below the price at the time I published the reports.

I have been very specific about watching when to enter the short side of these stocks.  The time to short is when the DJUSHB is at the end of a big spike up, like now.  You want to take partial profits after a steep sell-off, like the one that culminated the week of October 6. This graph shows where we are now (click to enlarge):

You can see that  this big spike up has been punctuated with lower volume than when the sector sells off.  The RSI is now flashing “overbought.”  I suggested that the DJUSHB would bounce up to the 50 dma and, possibly, to the 200 dma.  It’s almost at the 200 dma, which is 483.   Tomorrow existing home sales for September are reported.  Friday is new home sales.  I have no idea what kind of reports we’ll see, but there’s a good possibility both the National Association of Realtors and the Census Bureau will make their best effort to manipulate a good number.

I think you can start shorting at this point using some of the options strategies I discuss in my homebuilder reports.  I think that my two latest reports (the top two in the (homebuilder reports section) offer the best downside from here.  If you are nervous about the earnings reports and the housing sales reports, wait until next Monday to start shorting.

One last point, low interest rates are not going stimulate home sales.  We are already seeing this dynamic in effect.  Furthermore, there were reports that Obama’s new housing czar was going to urge FNM/FRE to reduce their credit standards.  But based on various measures, like Debt To Income (DTI) and credit scores, standards have been historically low for a few years now.  Furthermore, FHA has been offering low to zero down payment mortgages to people with crappy credit scores for 5 years.  This is why the delinquency and default rates on FHA paper from the 2008-2010 cohort years are soaring.  Easy money is not stimulating home sales and the investment buyer is done.