Homebuilder Shares in My Dog House

The title here highlights the truth, which is that the housing market remains pitiful. The National Association of Home Builders (NAHB) reported its Housing Market Index (HMI) Monday. The inherently biased industry trade group promoted the news of its one point gain for the month of June, over a revised lower prior month result. On that news, the SPDR S&P Homebuilders (NYSE: XHB) gained 2% Monday, with the shares of major builders Toll Brothers (NYSE: TOL), PulteGroup (NYSE: PHM), Lennar (NYSE: LEN), K.B. Home (NYSE: KBH), D.R. Horton (NYSE: DHI) and Beazer Homes (NYSE: BZH) up between 1.9% and 4.1% on the day. However, the absolute value of the index continues to reflect a dire situation for most home builders and remains hard for me to celebrate.

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.

Homebuilder Sentiment

The HMI improved to a mark of 29, up from 28 for May, revised from 29 at its initial reporting. The NAHB’s chairman said the gain was “reflective of the continued, gradual improvement we are seeing in many individual housing markets as more buyers decide to take advantage of today’s low prices and interest rates.” The economy is stagnating, though, with unemployment holding high and new labor data reflecting a stalling. Consumer confidence has hinged on fear around the European situation and stock market volatility. Economic activity has been tangibly impacted by lighter European buying and its impact to the global economy. Housing’s spring selling season has fallen short of hopes, based on the housing data flow to date.

The HMI report showed current sales conditions improved, with a relative component measure rising two points to 32. That’s the highest it’s been since April 2007, but it’s still poor. Builders’ views for the next six months were unchanged in June, with the component index measuring it remaining at a mark of 34. The most telling statistic is the measure of prospective buyer traffic, because it’s not based on hope or a subjective opinion, at least not as much as the other data points. Prospective buyer traffic was unchanged, and the index measuring it was stuck at a morbid mark of 23.

Regional results were mixed with the Midwest measure up five points to 31 and the West up four points to 33. The Northeast measure fell two points to 29 and the South dropped two points to 26. Please take careful not of this next point. Each of these numerical measures is deeply short of the breakpoint mark of 50, where delineation occurs between builders’ opinions of good and poor conditions. So, I ask you, how poor must housing market conditions be if the index measuring it is 20 points short of breakeven? I think I've made my point...

This article should also interest investors in home builders NVR Inc. (NYSE: NVR), Gafisa SA (NYSE: GFA), MDC Holdings (NYSE: MDC), Ryland Group (NYSE: RYL), Meritage Homes (NYSE: MTH), Brookfield Homes (NYSE: BHS), Standard Pacific (NYSE: SPF), M/I Homes (NYSE: MHO) and Orleans Homebuilders (AMEX: OHB).

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