Crack Expands in Housing Sector
The week’s data flow produced another crack in the foundation of the Real Estate sector and pounded housing stocks as well. After raising the volume on my bear call for housing over recent weeks, I suppose all I can say today is...I told you so!!!
Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.Housing Rally Failing
Construction Spending was reported Monday for the month of February, and the shares of homebuilders suffered a shock as a result. Total Construction Spending declined 1.1% in February, stunning economists who had forecast an increase of 0.7% at the consensus. When economic data misses significantly against the economists’ view, we see impact to stocks, whose valuation estimates are often influenced by the macro view at Wall Street firms, and are driven by relative sector strategy and industry favoritism as a result.
The shares of homebuilders took a sledge hammer to their bearing walls on the news, with the SPDR S&P Homebuilders (XHB) off 0.75% on a day when the SPDR S&P 500 (SPY) rose 0.73%. The XHB’s beta based on three years of data is listed as 0.99 by Yahoo Finance; that’s pretty much a 1.0, and yet the security moved in the polar opposite direction of the broader market Monday. Obviously, that was due to the industry specific information, which was outweighed in the broader market by the much more currently relevant global manufacturing data that reached the wire Monday. I say “more currently relevant” because of the severe shrinkage of the housing market over recent years and the numbed expectations for it within the stock market.
Homebuilder shares were broadly lower, with industry players Toll Brothers (TOL), D.R. Horton (DHI), K.B. Home (KBH), PulteGroup (PHM), MDC Holdings (MDC) and Lennar (LEN) all lower on the day. Several are lower again today, like Hovnanian (HOV) and Beazer (BZH).
More than the general drop in construction spending, which was affected by a 1.6% decrease in non-residential construction, the housing industry took a blow due to a 1.5% decline in new single family home construction. Multi-family projects fared well again, but a renter nation is not indicative of a healthy economy. Multi-family construction rose a full two percentage points in February, continuing its drive of overall residential construction activity.
In conclusion, I offer again one important caveat that is important for the larger publicly traded homebuilders in strong enough capital position to capitalize. The overall weakness of the housing industry has offered many of these firms a great opportunity to take market share. I expect that this is the key reason some have reported solid business results through a generally soft industry environment. I also believe this should support the shares of relative companies, especially once recovery is detected in earnest.
That said, I also believe the market does not perfectly understand this industry critical fact, and so housing stocks will be punished without discretion as the economic deterioration I expect unfolds. In the end, I believe all of such discounting will prove warranted, as the economic scenario I see as most likely is dire, and not one not generally forecast by economists. I have offered tidbits of information regarding this view in articles, but it is not specifically relative to this report. So, I will have more to say about it in the future within a detailed forecast for the economy.
Editor's Note: Article should interest investors in Investors Title (ITIC), Bank of America (BAC), Freddie Mac (FMCC), Fannie Mae (FNMA), Goldman Sachs (GS), Morgan Stanley (MS), Wells Fargo (WFC), Toronto Dominion (TD), UltraShort Real Estate ProShares (SRS), Ultra Real Estate ProShares (URE), ING Clarion Global Real Estate Income Fund (IGR), Xinyuan Real Estate Co. (XIN), Rydex Real Estate Fund H (RYHRX), T. Rowe Price Real Estate Fund (TRREX), Toll Brothers (TOL), Hovnanian (HOV), D.R. Horton (DHI), Beazer Homes (BZH), Lennar (LEN), K.B. Homes (KBH), Pulte Homes (PHM), NVR Inc. (NVR), Gafisa SA (GFA), MDC Holdings (MDC), Ryland Group (RYL), Meritage Homes (MTH), Brookfield Homes (BHS), Standard Pacific (SPF), M/I Homes (MHO), Orleans Homebuilders (AMEX: OHB), Vanguard REIT Index ETF (VNQ), PNC Bank (PNC), J.P. Morgan Chase (JPM), Hooker Furniture (HOFT), Ethan Allen (ETH), Pier 1 Imports (PIR), Williams Sonoma (WSM), Home Depot (HD), Lowes (LOW),XNFZX,FSAZX, Avatar Holdings (AVTR), Apartment Investment & Management (AIV), Equity Residential (EQR), Avalonbay Communities (AVB), UDR Inc. (UDR), Essex Property Trust (ESS), Camden Property Trust (CPT), Senior Housing Properties (SNH), BRE Properties (BRE), Home Properties (HME), Mid-America Apartment (MAA), Equity Lifestyle Properties (ELS), American Campus Communities (ACC), Colonial Properties (CLP), American Capital Agency (AGNC), Sun Communities (SUI), Associated Estates (AEC), PennyMac Mortgage (PMT), Two Harbors (TWO), Simon Property Group (SPG).
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