Seeing Green Shoots in this Homebuilder Measure

Homebuilder sentiment was measured this week, and it showed that while builders are generally feeling positive about their sector, they are not as giddy as they were a few months back. So what does the Housing Market Index say for real estate? See the whole story at Latest Homebuilder Measure Offers Reason to Believe.

Housing Relative Shares	05-17 to 05-19 Close
SPDR S&P Homebuilders (NYSE: XHB)	-0.5%
PulteGroup (NYSE: PHM)	-2.1%
D.R. Horton (NYSE: DHI)	-0.7%
K.B. Homes (NYSE: KBH)	-0.8%
Toll Brothers (NYSE: TOL)	-0.4%
Hovnanian (NYSE: HOV)	+0.6%
Lennar (NYSE: LEN)	-0.8%

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only. Editor's Note: Article should interest investors in Investors Title (Nasdaq: ITIC), Freddie Mac (OTC: FMCC.OB), Fannie Mae (OTC: FNMA.OB), UltraShort Real Estate ProShares (NYSE: SRS), Ultra Real Estate ProShares (NYSE: URE), ING Clarion Global Real Estate Income Fund (NYSE: IGR), Xinyuan Real Estate Co. (NYSE: XIN), Rydex Real Estate Fund H (Nasdaq: RYHRX), T. Rowe Price Real Estate Fund (Nasdaq: TRREX), Toll Brothers (NYSE: TOL), Hovnanian (NYSE: HOV), D.R. Horton (NYSE: DHI), Beazer Homes (NYSE: BZH), Lennar (NYSE: LEN), K.B. Homes (NYSE: KBH), Pulte Homes (NYSE: PHM), 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), Orleans Homebuilders (AMEX: OHB), Vanguard REIT Index ETF (NYSE: VNQ), PNC Bank (NYSE: PNC), J.P. Morgan Chase (NYSE: JPM), Hooker Furniture (Nasdaq: HOFT), Ethan Allen (NYSE: ETH), Pier 1 Imports (NYSE: PIR), Williams Sonoma (NYSE: WSM), Home Depot (NYSE: HD), Lowes (NYSE: LOW), Nasdaq: XNFZX, Nasdaq: FSAZX, Avatar Holdings (Nasdaq: AVTR), Apartment Investment & Management (NYSE: AIV), Equity Residential (NYSE: EQR), Avalonbay Communities (NYSE: AVB), UDR Inc. (NYSE: UDR), Essex Property Trust (NYSE: ESS), Camden Property Trust (NYSE: CPT), Senior Housing Properties (NYSE: SNH), BRE Properties (NYSE: BRE), Home Properties (NYSE: HME), Mid-America Apartment (NYSE: MAA), Equity Lifestyle Properties (NYSE: ELS), American Campus Communities (NYSE: ACC), Colonial Properties (NYSE: CLP), American Capital Agency (Nasdaq: AGNC), Sun Communities (NYSE: SUI), Associated Estates (NYSE: AEC), PennyMac Mortgage (NYSE: PMT), Two Harbors (AMEX: TWO), Simon Property Group (NYSE: SPG).

Home Builders - Why So Blue?

The National Association of Home Builders (NAHB) reported its Housing Market Index (HMI). The HMI is a measure of homebuilder sentiment, and it showed homebuilders were blue about February. The shares of the SPDR S&P Homebuilders (NYSE: XHB) came down off a gap-open higher open once the HMI report was released. The report showed the HMI fell in February to 53, from 55 in January. Readings above 50 indicate a generally positive mood, but the decrease in the HMI was the third consecutive decline and it is approaching that breakeven mark. See my full report on housing here.

Homebuilder Shares	03-16-15
Pultegroup (NYSE: PHM)	+0.2%
D.R. Horton (NYSE: DHI)	+1.0%
K.B. Home (NYSE: KBH)	-0.4%
Toll Brothers (NYSE: TOL)	-0.6%
Beazer Homes (NYSE: BZH)	-0.7%
Ryland Group (NYSE: RYL)	+0.3%
Lennar (NYSE: LEN)	+0.2%
Hovnanian (NYSE: HOV)	-1.5%

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Did Home Builders Just Warn Us of Trouble?

The National Association of Home Builders (NAHB) released its Housing Market Index (HMI) on Thursday. The builder’s group would have you believe that everything is hunky dory in housing, except for complaints about materials costs and foreclosure afflicted appraisal values, but the fact is that the HMI measured lower in January than it did in December. I’m a believer that change matters, and so we have to wonder if the lower result, however small the change, portends new trouble in real estate.

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 Market Index

The HMI fell in January to 56 from the revised December reading of 57 (58 at initial reporting). Now, readings over 50 still signify that more builders view things optimistically than pessimistically today, so it’s a good thing. However, a drop in the level of overall confidence may say something else. It indicates that some builders view things a little less positively currently than they did last month. Add that information to data dips in other metrics over recent months and we form a question, a question about the stability of the real estate recovery.

All three HMI components fell in January:

• Current Sales Index fell 1 point to 62
• Future Sales Index fell 2 points to 60
• Prospective Traffic Index fell 3 points to 40

The NAHB quotes a 3-month moving average for its regional reporting, which of course will mask whatever happened in the last third of that period. It only makes me worry a bit more about exactly what the month’s data would have shown.

Three month moving average for regions:

• Northeast +4 points to 42
• West +4 points to 63
• South unchanged at 56
• Midwest -1 point to 58

The one-day chart for Thursday shows that after the 10:00 AM ET release of the data, home builder shares broadly fell. However, by the close of the day they had recovered. Builder’s shares have not fared so well this year, though, and many are questioning whether they have priced in a better real estate recovery than is today’s reality.

Home Builder Shares	Year-to-Date
SPDR S&P Homebuilders (NYSE: XHB)	-3.1%
PulteGroup (NYSE: PHM)	-3.3%
K.B. Home (NYSE: KBH)	-1.4%
D.R. Horton (NYSE: DHI)	-1.5%
Toll Brothers (NYSE: TOL)	-2.0%
Hovnanian (NYSE: HOV)	-8.0%
Beazer Homes (NYSE: BZH)	-7.8%

Other real estate data points have recently shown a stumble for the sector as well. We talked about the October lull in the Pending Home Sales Index in a previous article; it was attributed to the government shutdown and debt ceiling debacle. In that report, we also noted that construction spending had declined in October within the private sector. Fear of Fed taper was also relevant at the time, so we looked for a temporary excuse on that issue as well.

We thought that perhaps home builder sentiment might just be lagging this information, but this morning, Housing Starts data showed the annual pace declined to 999K in December, from 1.107 million in November. Permits declined as well, to 986K from 1.017 million. Looking back a bit further, New Home Sales drifted in November to a pace of 464K, down from 474K. Existing Home Sales likewise declined in November, to an annual pace of 4.9 million, from 5.12 million. And we just debunked the supposed positive news reported this week about mortgage activity.

So, perhaps the dip in home builder sentiment is relevant, however slight it may be, since there are signs of issue in other data points. That’s not to mention the year-to-date price action in the home builder shares, which seems to also reflect trouble ahead. My colleague and real expert at my own blog, Arizona’s Michael Douville, just posted an extremely pessimistic real estate forecast for 2014. It was so negative that it put me on edge, yet he still suggests investment, though in a strategic manner in anticipation of tougher times. Given all the subtle signs and my colleague’s warning, perhaps home builders are also offering us an early indicator that we should take heed of.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Why Real Estate Shares Fell When Stellar New Home Sales Were Reported

New Home Sales were reported running at a stellar annual rate in October, and yet the shares of homebuilders and other real estate relative stocks fell sharply on the day of the report. Here’s why…

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.

Real Estate Stocks

Real Estate Relative Stock	12-04-13 Performance
SPDR S&P 500 (NYSE: SPY)	-0.1%
SPDR S&P Homebuilders (NYSE: XHB)	-0.7%
PulteGroup (NYSE: PHM)	-2.4%
K.B. Home (NYSE: KBH)	-2.3%
D.R. Horton (NYSE: DHI)	-1.8%
Toll Brothers (NYSE: TOL)	-2.4%
Hovnanian (NYSE: HOV)	-2.5%
Bank of America (NYSE: BAC)	-1.3%
Annaly Capital (NYSE: NLY)	-0.6%

Judging by the exaggerated underperformance of real estate relative stocks last Wednesday you might have thought it was a bad day for housing data, but it was not. While the S&P 500 was down just fractionally on the day, homebuilders, housing lenders and dealers in mortgage securities, among a large group of real estate relative stocks, declined sharply. The nation’s largest builder, PulteGroup (NYSE: PHM), led the way in its decline of 2.4%. The nation’s most important mortgage lender, Bank of America (NYSE: BAC), was off 1.3%. Annaly Capital (NYSE: NLY), the widely held mortgage REIT, dropped 0.6%. It was a bad day all around; but was it really?

New Home Sales were reported running at an annual pace of 444K in the month of October. That was well above the also just reported September rate of 354K (late due to government shutdown). Economists had foreseen a strong level of sales for October, but the consensus forecast was still short of the amazing actual result by 19K. The Midwest and South showed the best rate of increase over September, but every region of the nation reported impressive double-digit growth. Don’t forget also that the Northeast and West are the two largest and established real estate markets, so growth in new home sales are harder to come by within them.

Region	Growth in October over September 2013
United States	25.4%
Northeast	19.2%
Midwest	34.0%
South	28.2%
West	15.2%

So if the industry relative data was strong, the reader must be wondering why real estate relative stocks collapsed on the day of the report. You can look to the Beige Book for your catalyst. The market interpreted the Federal Reserve report, which was also released on Wednesday, in a way that would threaten the path of real estate market development. It was not because of a failing economy, though, but rather due to a steadily improving one. The concern among real estate sector investors is that the Federal Reserve will keep to its promise to taper back asset purchases if the economy continues to show significant enough improvement. That means less demand for mortgage backed securities and higher mortgage rates. Investors found in the Beige Book Report what seems to fit that perspective, and so they sold off the housing and real estate relative stocks despite the strong new home sales data.

Interest rates increased sharply on the day, and with them, mortgage rates. You can see in the daily Treasury Rate data that 30-year treasury rates increased by 6 basis points on Wednesday December 4th alone. Likewise, you can see within the weekly mortgage rate data that rates for 30-year fixed rate mortgages were up 11 basis points through the week ended December 4, 2013. When the news is reported for this week, it will likely show even higher mortgage rates.

Higher mortgage rates are bad news for a real estate sector that has desperately needed the government’s support to find traction post the real estate collapse. Paying due credit to the latest and greatest Employment Report, the economy still seems burdened by a secretly still unemployed sector of America, which is now found within the pool of people collecting disability or welfare support or off the radar completely after having come out of the workforce count. Thus, housing enthusiasts have rightfully lost some optimism. The pool of those qualified to get a mortgage is likewise stifled somewhat by a still careful lending sector that has the watchful eye of regulators upon it now.

With this perspective, we can understand now why housing relative stocks declined on a day when new home sales ran up to a much better annual pace. From this analyst’s perspective, the taper will come relatively soon, and it will still result in higher interest rates and a drag on the businesses of these real estate companies and also their stock shares. So in my view, last Wednesday offered us a glimpse into what is to come.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Builder Confidence Soars – Don’t Believe the Hype

The National Association of Home Builders (NAHB) today reported its Housing Market Index (HMI) for the month of June, and it marked an important shift. For the first time since falling under the break-even mark of 50.0 at the start of the real estate collapse, the HMI rose back above it today. However, a closer look at the data shows it remains suspect and unreliable as a forecasting tool.

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.

Builder Confidence

The HMI surged 8 points, rising to a mark of 52 for June. The last time it rose that much was in 2002, so this is strange to begin with. It’s the first time the index sat above breakeven since April 2006. Each of the three components of the index increased, though take note of the much lower level of the index measuring actual prospective buyer traffic. I view both the other two metrics as being speculative in nature or prospective, but the “prospective buyer traffic” figure actually accounts for what builders are really seeing in terms of activity. The current sales conditions index is measuring sentiment about “conditions,” not sales.

	June Level	June Change
Housing Market Index	52	+8
Current Sales Conditions	56	+8
Expectations Index	61	+9
Prospective Buyer Traffic	40	+7

Regionally speaking, the component indexes seem to say builders are buyers into the “grass is greener” philosophy. Because, when measuring their own operating regions, it seems they’re not seeing the best of circumstances. Otherwise, explain why each regional index sits under 50 while the national measure is above it.

	June Level	June Change
Northeast	37	+1
Midwest	47	+3
South	46	+4
West	48	-1

Builder confidence gained on what the NAHB chairman said was a lack of inventory in the existing home market. That’s a positive way to look at it from a biased industry viewpoint, but I see something else catalyzing the sudden surge. Builders are just coming out of the spring selling season, where business is generally better than the rest of the year. Also, they’ve likely seen some buyers pushed into action on the sudden surge in mortgage rates recently. However, I disagree, as I do not see that happening based on the real mortgage activity data; in fact I see the opposite occurring. Last week’s increase in mortgage activity was a flawed data point in my opinion. Anyway, activity driven by rising rates would be from the buyers on the fence, of which the number is limited. So such a surge would not be sustainable, and would not be driven by underlying economic catalyst, but instead by fear of missing the opportunity.

Housing stocks surged today on the news, but I do not see a good enough reason for it here.

Housing Security	6/17/13 thru Noon	52-Weeks
SPDR S&P Homebuilders (NYSE: XHB)	+1.9%	+55%
iShares Dow US Real Estate (NYSE: IYR)	+0.1%	+9%
PulteGroup (NYSE: PHM)	+3.6%	+140%
K.B. Home (NYSE: KBH)	+3.2%	+180%
D.R. Horton (NYSE: DHI)	+2.6%	+54%
Toll Brothers (NYSE: TOL)	+3.8%	+35%
Hovnanian (NYSE: HOV)	+2.6%	+158%
Beazer Homes (NYSE: BZH)	+2.7%	+53%
Lennar (NYSE: LEN)	+1.7%	+53%

Let’s not forget that the index is only at about breakeven, and that the perspectives of a large number of smaller builders surveyed is keeping it down. It’s the larger builders, who have gained market share on the failures of the smaller players, who have benefited most from the crisis shakeout. That is behind their numbers as much as anything else, because the general levels of activity, while improving, is not all that great yet. In any event, these stocks have had a great run, but they are probably extended and still vulnerable here.

The economy is slipping currently, in my view, and mortgage rates are moving in the wrong direction too quickly. This week, the Fed had better fix the mess it created in mid-May, or mortgage rates will continue rising and potentially derail the real estate recovery.

In conclusion, there is enough suspect data in the HMI to question the message that is being received by housing stocks today. With the Fed meeting being the obvious determining factor this week, I’m not buying housing stocks on this news, and recommend investors wait a few days before placing bets. We need the Fed to cut its economic forecast and hedge on its recent hawkish commentary, so mortgage rates will back up and the real estate recovery will be secured.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Ignore the Home Builder Pessimism

By The Greek:

Earlier this week, the National Association of Homebuilders’ (NAHB) Housing Market Index showed an intensified level of pessimism for homebuilders. Yet, I’m telling you not to worry about it, because it doesn’t matter.

The NAHB’s Housing Market Index (HMI) dropped 2 points in March, after shedding a point in February. The HMI fell to a mark of 44 in March, from 46 the month before, and made fools of economists who on average were expecting the index to improve by one point to 47.

The NAHB explained the falloff and the third straight month of flat to deteriorating data on ancillary issues. The industry group said that builders were still seeing increasing demand for new homes, but were frustrated by “bottlenecks in the supply chain for developed lots along with rising costs for building materials and labor.” And despite what seems like a better capital position for housing lenders like Bank of America (NYSE: BAC), according to the Federal Reserve, credit availability was reported as an ongoing problem. The NAHB also regularly mentions faulty appraisals, which include the values of sold distressed properties as comparables.

Yet, I’m telling you that there’s nothing to worry about. This index has remained underwater since the real estate market collapse, despite the nascent success of the nation’s largest builders. That’s the issue here. The NAHB is made up of builders, large and small, liquid and insolvent. Many small builders remain constrained by an inability to access capital. However, the large publicly traded builders including those listed herein are doing fine and dandy and are on an optimistic high today. They have access to capital, and the ability to steal market share from their humbled brothers. The evidence of their success is clear here.

Publicly Traded Builder	Year-to-Date Gain Thru 03/21/13
SPDR S&P Homebuilders (NYSE: XHB)	+13%
K.B. Homes (NYSE: KBH)	+40%
D.R. Horton (NYSE: DHI)	+26%
PulteGroup (NYSE: PHM)	+16%
Ryland Group (NYSE: RYL)	+14%
NVR (NYSE: NVR)	+14%
Toll Brothers (NYSE: TOL)	+10%
Lennar (NYSE: LEN)	+10%
MDC Holdings (NYSE: MDC)	+5%

They are not all higher on the year though. Beazer Homes (NYSE: BZH) and Hovnanian (NYSE: HOV) are in the red. Some of the difference has to do with regional variation. Some of the once hottest markets fell far from their peaks, but those same markets are on fire today again, including Phoenix, Las Vegas, California and Florida. K.B. Homes’ (KBH) west coast operations are a big reason for its performance this year. The HMI Report showed that the three-month moving average for the West Regional Index was up four points in March, and was easily in positive territory above 50 at a mark of 58. The Northeast Index was unchanged at 39, while the Midwest and South Indexes skidded by a point each to 47 and 46, respectively.

The part of the report I’ve always found most interesting is where builders are asked to report on current sales conditions, forward expectations and actual prospective buyer traffic. I find the first two measures are purely perceptional, and that the measure of real traffic tells a different and truer story for the majority of builders, who are mostly small. The index measuring current sales conditions fell by four points to reach a mark of 47. The measure of sales expectations for the next six months rose by one point to 51. However, the measure of prospective buyer traffic rose three points, and still measured deeply under breakeven sentiment at a mark of 35. Remember, though, it doesn’t matter because the real estate recovery is underway nonetheless. It’s just being enjoyed by a select few publicly traded companies which have garnered a good deal of market share from the least among their peers.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Hot and Bothered by the Housing Market Index

By The Greek:

It’s not the one point decline in the Housing Market Index that worries me, but the why and the how the index declined. I think the component measures of this index say a lot about the real state of housing inclusive of smaller non-public builders. As far as the public companies go, I continue to see those firms gaining market share due to their capital advantage and crisis survival, where smaller builders failed. Still, even the larger builders face some negative fallout from the crisis and that is also discussed herein.

The National Association of Homebuilders (NAHB) reported its Housing Market Index (HMI) for the month of February Tuesday. The HMI declined by a point to a mark of 46, down from 47 in January. Economists were looking for another increase in the recently improving trend that would have taken the index to a mark of 48 this month. The NAHB attributed the softness to the usual suspects, an uncertain employment situation and constraints to consumer borrowing. Obviously, that second factor is for the industry’s own good and the result of the excesses of the financial crisis and real estate collapse.

However, the NAHB added a couple new issues to the spectrum of challenges facing homebuilders. The organization indicated that rising materials costs and a labor shortage in construction were working against recovery. The labor issue was a topic that came up during the presentation by Toll Brothers (TOL) at the Emerald Groundhog Day Investment Forum, which I was privileged to attend this year in Philadelphia. Construction shed jobs measuring in millions through the industry purge post real estate collapse, but it should be luring manual laborers back as it regains steam. Still, many of those former construction workers will have developed new skills and found other work by this point, and that’s the issue the industry must confront now. It pushes the cost of labor higher, though both higher materials costs and labor are also the result of housing demand in this case, and that’s a good thing.

What has me hot and bothered about the HMI this month are the component indexes, which continued to illustrate a difficult truth. The NAHB offers measures of the industry’s current sales conditions, forward sales expectations and traffic of prospective buyers. While both the current sales conditions metric (down 1 to 51) and the forward sales expectations read (up 1 to 50) marked ground above the break-even threshold of 50, the real measure of actual prospective buyer traffic remained deeply underwater. With the traffic mark falling by four points to a level of 32, it represents a sad state of affairs that actually deteriorated in February. Expectations can be built on what builders are reading here and elsewhere about the housing recovery, but prospective buyer traffic is a true measure of actual activity, and it says a lot about the state of housing.

What it tells us is that the many small builders still being surveyed by the NAHB remain troubled due to a lack of access to capital and their relative inability to compete in terms of pricing and marketing. This is the reason why this recovery is so bifurcated, with the surviving large public builders gathering up massive market share from the purge of the disease stricken little guys. That said, the news of the overall index slippage still harmed housing stocks broadly Tuesday, with many major builders seeing share price decline.

Builder & Ticker	2/19 Change
SPDR S&P Homebuilders (NYSE: XHB)	-0.2%
PulteGroup (NYSE: PHM)	-1.8%
D.R. Horton (NYSE: DHI)	-1.6%
K.B. Homes (NYSE: KBH)	+0.8%
Toll Brothers (NYSE: TOL)	-0.5%
Beazer Homes (NYSE: BZH)	-0.8%
Lennar Homes (NYSE: LEN)	-0.7%
Hovnanian (NYSE: HOV)	-4.3%

Of this group, K.B. Homes (KBH) likely benefited from the appearance of Weyerhaeuser’s (NYSE: WY) CEO on CNBC Tuesday, and the company’s continued enthusiasm about its strongly improving California market. KBH has serious west coast exposure. The NAHB Likewise had some good news to report on a regional basis for the West Coast. The regional metric for the West showed a four point uptick to a reading of 55. The Northeast measure was up three points to 39, but the Midwest and South regions both deteriorated by two points to 48 and 47, respectively.

Toll Brothers (TOL) was down slightly ahead of its later reported earnings disappointment, but readers of this column should have been prepared for that given our expression of concern yesterday regarding visibility into the current result for TOL (see page 2). Our report linked here, offers insight into the rest of the week for real estate as well.

The HMI data reminds us that this recovery is not all encompassing, with varying degrees of activity by region and by industry player. The change in industry shares on such a small adjustment also tells us that much of the good news is priced in to homebuilder shares, making them especially sensitive to bad news.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.