Builders' Tail Wags the Dog

By "The Greek"

The National Association of Homebuilders (NAHB) published its Housing Market Index (HMI) Tuesday, and the shares of homebuilders climbed higher on the news. The SPDR S&P Homebuilders (NYSE: XHB) was up 2.1% on the day. However, I’m of the opinion that the tail is wagging the dog here.

First, let me reassure real estate enthusiasts that I agree that the housing market has bottomed and is recovering. I was one of the first to make that call, just see my July 2011 article saying as much, but I have been warning (painfully so) that economic conditions should deteriorate and affect the market for new homes and the shares of cyclical homebuilders. Still, I’ve also advised stock investors that the well-capitalized publicly traded homebuilders like PulteGroup (NYSE: PHM) and Toll Brothers (NYSE: TOL) would continue to gain market share from beaten down smaller builders, and advantage from that.

I’ve also recently suggested that now is probably the best time to buy a home and real estate generally, but I believe that this is a special situation that may not last for long with real estate prices likely to spike along with mortgage rates. I expand on this view in an article I’ve begun working on for Seeking Alpha that I expect to publish shortly. Still, I also believe that for most builders, the HMI better reflects what they are hearing and reading than what they are seeing in terms of traffic through model homes and phone calls for custom builds.

The NAHB surveys builders of all sorts and sizes, and I believe this has been the reason why the index has remained under the break-even mark of 50 for so long. Most builders are still behind the eight ball when you take an all-inclusive look. I bet if you asked the ten largest builders in isolation, you would get a number much higher than 50 on the HMI, but if you asked the 100 smallest, you would find a number far short of the current index. Or, you would find a similar figure, but one built on little tangible reason, because builders like the rest of us, keep reading and hearing about how the real estate market is improving.

Anyway, the December read of the HMI produced the eighth consecutive month of increase. The index edged up to 47, from a revised lower reading of 45 (46 initially) for November. Surveyed economists were in agreement in their forecasts at the consensus, and so the shares of builders rallied Tuesday on the good news.

Homebuilder	Tuesday’s Change	YTD Change
SPDR S&P Homebuilders (XHB)	+2.1%	+59%
PulteGroup (PHM)	+3.2%	+195%
Toll Brothers (TOL)	+0.9%	+59%
K.B. Home (NYSE: KBH)	+3.3%	+156%
D.R. Horton (NYSE: DHI)	+2.0%	+62%
Beazer Home (NYSE: BZH)	+5.3%	+32%

 * Performance adjusted for dividends and splits

My thesis is reinforced by the NAHB data. While two of the HMI components improved in December to above 50.0, the component measuring the actual traffic of prospective buyers was still just 36, 14 points below the level that would signify a neutral industry observation.

HMI Component Index	Current Mark	Monthly Change
Current Sales Expectations	51	+2
Forward 6 Month Expectations	51	-1
Buyer Traffic	36	+1

Considering that 50 marks where an equal number of builders find the situation good as find it poor, we would temper enthusiasm about the new home market. And given the gains in the XHB and most homebuilders’ shares this year, there’s all the more reason to expect pushed forward capital gains selling in January. So, if the shares rally some more on a fiscal cliff solution that is inclusive of ongoing real estate incentives, I would take profits in these shares sooner rather than later.

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.

Mortgage Application Relief Post Sandy

The Mortgage Bankers Association (MBA) today reported that mortgage application volume increased substantially, but for what reason. Well, there appear to be two, one important economic driver and another extraordinary catalyst. Rates declined through the week ending November 9, offering an important driver for activity. However, the passing of Hurricane Sandy seems to have led to pent-up demand in the highly populated Northeast, which unraveled last week and skewed the data.

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.

The MBA’s Market Composite Index increased by 12.6% against the immediately preceding week. Growth had balanced support between refinancing activity and mortgage applications on the purchases of homes. The Purchase Index, which measures applications filed for home purchases, increased 11% against the prior week on a seasonally adjusted basis. The Refinance Index likewise rose, increasing by 13% in the reported period.

We can look to mortgage rate activity for a catalyst for refinancing, as effective rates decreased across the range of mortgage loan types. Conforming loan mortgage rates for 30-year fixed rate mortgages even set a new record, falling to 3.52% from 3.61% in the prior week. The average contracted rates for each type of mortgage loan balance follow below. However, in some cases the change was not substantial. There certainly seems to be another catalyst, as further evidenced by a change in trend. This was the first increase in the Refinance Index in 6 weeks.

Loan Type	Rate & Change
30-Yr. Conforming Balance	3.52% (down 9 Basis Points)
30-Yr. Jumbo Loan	3.83% (down 5 BPs)
30-Yr. FHA Sponsored	3.34% (down 3 BPs)
15-Yr. Fixed	2.88% (down 7 BPs)
5/1 ARMS	2.6% (down 1 BPs)

The other catalyst is clear, and it will be affecting economic data for a good time forward, as monthly reports begin to reach the wire for the relative period. It was Hurricane Sandy and the storm’s stifling of business activity. The seasonally adjusted Purchase Index improved by 11%, and the unadjusted measure rose by 8%, obviously adjusted for the storm. The MBA, in my observation, has been imperfect in its seasonal adjustments, and seems to have also understated the impact of the storm here.

On a year-over-year basis, the Purchase Index was 22% higher than the same week a year prior. Obviously, the housing market is healthier this year than last, and some of that improvement is reflected here, but we might look to data from weeks prior to see how the year-to-year difference differs. In this report from October 3rd, we see that in a period of rate driven gains, the year-to-year improvement in the Purchase Index was just +11% versus this week’s +22% increase. I think this comparison clearly exposes the Hurricane impact and imperfect adjustment for it.

As a result, we’ll need to temper our enthusiasm for the housing and banking industries that may have resulted from this report. You can see today’s morning changes in relative stocks here.

Relative Housing & Finance Stocks	Wednesday Morning Change
Financial Select Sector SPDR (NYSE: XLF)	+0.2%
SPDR S&P Homebuilders (NYSE: XHB)	+0.3%
Bank of America (NYSE: BAC)	+0.1%
Citigroup (NYSE: C)	+0.5%
J.P. Morgan Chase (NYSE: JPM)	+0.3%
Wells Fargo (NYSE: WFC)	+0.4%
PulteGroup (NYSE: PHM)	-1.6%
Toll Brothers (NYSE: TOL)	-0.8%
Hovnanian (NYSE: HOV)	-0.8%

We can see that while homebuilders are up generally, the shares of these three relative players are lower today, perhaps correcting for earlier gains or for other very relative reasons. The financial shares listed here are up modestly, despite ongoing fiscal cliff pressures but perhaps in correction to previous decrease. It’s hard to say what the impact of this data is, but, with regard to Sandy, I believe investors are realizing that while reconstruction efforts will be broad, the benefits will be widespread among independent construction companies and perhaps minimal to a handful of publicly traded builders. I reiterate my favor of building supply stores for investors seeking a storm play.

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.

Homebuilders Hurt More than Helped by Sandy

The shares of homebuilders climbed initially on the view that they might benefit from the Hurricane Sandy rebuilding effort. However, I believe homebuilders operating in the Northeast will be hurt more than helped by the storm. I think the movement lower by the shares before the close Friday, negating much of the week’s prior gains, is indicative of that. Yet, some of the companies involved managed to retain a portion of their paper profits on the week, and so there remains opportunity to close out profits on any relative short-term bets.

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.

Homebuilders and Hurricane Sandy

The shares of the SPDR S&P Homebuilders (NYSE: XHB) climbed 3.3% through the week, as investors frenziedly sought Hurricane Sandy stock plays. The idea behind buying homebuilders on the storm event is that a rebuilding effort would drive business. However, I think the costs of business disruption should overrun any benefits investors chased initially. Rather than buying homebuilders on the storm catalyst, I think investors would be better served buying the builder supply stores, since they will attract demand for all sorts of supply and repair needs. See my linked to article here, as I believe two important stocks remain attractively valued today.

Let’s look at how the homebuilders with Northeast U.S. operations did last week. I have listed the performance for the week plus the performance for last Friday so you can see how much of a reversal occurred on what I believe is a better understanding of where value will be created and where it will be destroyed in stocks because of the hurricane.

Company & Ticker	10/26/12 – 11/02/12
Toll Brothers (NYSE: TOL)	-4.8% (Friday -3.3%)
PulteGroup (NYSE: PHM)	+0.5% (Friday -2.3%)
D.R. Horton (NYSE: DHI)	+1.3% (Friday -3.7%)
Hovnanian (NYSE: HOV)	+10.5% (Friday +4.9%)
Beazer Homes (NYSE: BZH)	+0.2% (Friday -2.2%)
Lennar (NYSE: LEN)	+0.8% (Friday -2.6%)
MDC Holdings (NYSE: MDC)	-1.5% (Friday -8.4%)
Comstock Holdings (Nasdaq: CHCI)	Unch. (Friday -1.4%)
NVR Inc. (NYSE: NVR)	+0.3% (Friday -1.5%)

Some $10 billion in property damage is expected at minimum due to the storm, but that includes damage to boardwalks, storm walls, piers, roads, bridges, tunnels, other transportation channels and industry including subways and airports, etc. Let’s be clear that $10 billion in new homes will not be built as a result of Hurricane Sandy. Also, in many cases, wealth has been destroyed and will not be restored, meaning an equal value home may not replace what once existed in every lot. Also, reconstruction that does occur may occur over a long period of time and have a diluted impact for the construction industry, as in many cases, homes near the shore line are second homes or rental properties or are owned by resource constrained entities.

For a builder to benefit, they would have to buy up individual lots of destroyed area, which is much more tedious than the effort they usually undertake to buy vast acres to develop upon. For some builders, especially those which build multi-family structures, opportunity may better exist. Some may not be willing to undertake the task due to the weather, despite the long history of relative calm in the area. Two hurricanes have now endangered Northeastern shores (and some) over the past two years, and so prospective developers may consider the possibility of a shift in weather risk to a more active period for the Northeastern U.S. Finally, the areas of completely destroyed homes are going to be relatively limited, and the rebuilding may be greatly undertaken by current owners and local contractors. In some cases, perhaps opportunity will exist for the large publicly traded builders, but with a limited opportunity and a pool of possibilities, it is clearly a speculative gamble to go long builders generally on the Sandy catalyst alone. I reiterate, go to the construction supply stores for the best bang for your buck.

Furthermore, the power outages, heavy rainfall and other disruption to the basic daily operations of these businesses are important. Potential buyers have been perhaps impaired due to damage borne at currently owned properties, or due to other costs. Business has certainly been disrupted by the shortage of gasoline in many parts of the region and other blockages to normal daily life. Construction in process has likewise been disrupted, perhaps by damage or flooding, and certainly by the storm itself. Days lost in the construction process do not earn credit at lenders’ for interest expenses. So costs to builders operating in the region are two-fold, on the demand side and in operations. When all these things are taken into account, we see there is certainly no blank benefit created by the destruction caused by the storm.

Builders have come a long way from the pit of the real estate collapse, and are now benefiting from market share wins and a scarce supply of new construction. But any of last week’s gains that came on the Sandy catalyst should work their way out of these stocks. On an individual corporate basis, we may discover that some companies find later benefit, and we’ll explore these possibilities in the future. Please feel free to keep us informed of any such specific and detailed efforts and we’ll consider researching and reporting of any related and important impact.

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.

Disaster for Some Stocks is Blessing for Others

The disaster now understood as Superstorm Sandy is wreaking havoc upon the economy and upon most industries, but one industry that keeps finding blessings where others are finding curse, wins again today. The construction industry and building supply companies should find support from what was perhaps the most destabilizing storm in the history of the Northeast.

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.

The shares of the SPDR S&P Homebuilders (NYSE: XHB) are up another couple percentage points Thursday, after gaining on Wednesday as well. Some $10 billion in property damage is approximated by experts as the result of Hurricane Sandy Frankenstorm. For an industry where new home supply is already scarce due to a long period of inactivity, this means business. Whether the large builders participate or not though, the building supply companies like Builders FirstSource (Nasdaq: BLDR), Home Depot (NYSE: HD), Lowe’s (NYSE: LOW), Beacon Roofing (Nasdaq: BECN), USG (NYSE: USG) and Masco (NYSE: MAS) should make out big. Certainly, investors are betting on it, with some of these shares up sharply today.

Company & Ticker	Thursday Midday Change
Builders FirstSource (BLDR)	+8%
Home Depot (HD)	+1.2%
Lowe’s (LOW)	+1.6%
Beacon Roofing (BECN)	+0.7%
USG (USG)	+2.1%
Masco (MAS)	+6.2%

Whether a new home is built or not, roofs need repairing, siding needs replacement, water damaged drywall must be removed and replaced, and portions of some homes must be renewed. So the building supply companies are finding capital on the free market today. The low lying fruit has been taken in many of these names, but there are still untapped gains to be found within the sector.

The homebuilders should find a smaller benefit from the disaster, as the complete replacement of homes are going to be limited in number. In actuality, the storm may have caused damage at construction sites, costing some of the companies operating in the Northeast. Also, the work stoppage will cost these companies some capital, and some potential buyers will have been economically impaired. My view is that the impact is less important in this space than in the building supply space. That has not stopped the stocks from rocketing higher today though.

Builder & Ticker	Thursday Midday Change
Toll Brothers (NYSE: TOL)	+2.1%
PulteGroup (NYSE: PHM)	+2.9%
D.R. Horton (NYSE: DHI)	+3.5%
Hovnanian (NYSE: HOV)	+2.3%
Lennar (NYSE: LEN)	+2.4%
Beazer (NYSE: BZH)	+2.6%

Rental space providers should also benefit from the storm, as displaced and economically hampered Americans must move somewhere. The easiest option for the displaced, after friends and relatives, are the apartment rentals. This is probably why the shares of many apartment rental REITs are higher today. The shares of Apartment Investment & Management (NYSE: AIV), Equity Residential (NYSE: EQR) and Avalonbay Communities (NYSE: AVB) are higher by 0.7% each. Take note that all the players are not rising, as regional plays gather capital allocation from capital previously allocated to names in other regions.

So, even as airlines, retailers and many other discretionary capital destinations suffer today and over the next quarter, some are finding a blessing for their shares. It just goes to show you that even in disaster, opportunity can be found.

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.

Record Low Mortgage Rates Bear Fruit

The latest mortgage activity report published by the Mortgage Bankers Association (MBA) this morning shows record low mortgage rates are making an impact. The MBA’s data indicates average contracted rates dropped across varying types of mortgage loans last week, driving a surge in refinance activity. Such a change, while occurring simultaneously with housing price rise, offers to lower the cost of housing on net for a great many people. The benefits of lowering the cost of living for Americans should theoretically include increased consumption and GDP growth. So hold the presses, this is really good news.

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.

The MBA reported that its Market Composite Index increased 16.6% on a seasonally adjusted basis in the week ending September 28. Despite being adjusted, we must note that such adjustment could be imperfect and may matter for the religious holiday filled month of September. That said, my feeling is that it did not likely make a significant impact. The unadjusted rate of increase was marked at 17% against the prior week.

Mortgage rates dropped by significant degree across the spectrum of mortgage loan types. This spurred the MBA’s Refinance Index higher by 20% to its highest level since April of 2009. It also drove the percentage of refinance activity up as a portion of total mortgage loan applications. Refinances made up 83% of all applications in the period, up from 81% the week before.

Loan Type	Average Rate	Change
30-Year Fixed Conforming	3.53%	-0.1%
30-Year Fixed Jumbo	3.82%	-0.05%
30-Year Fixed FHA Sponsored	3.37%	-0.07%
15-Year Fixed	2.9%	-0.08%
5/1 ARMS	2.59%	-0.02%

This is one of few times I believe this report should be supporting stocks broadly, but because of duration of the downturn, it is likely being mostly overlooked. Besides, as I’ve recently discussed, there is much weighing against stocks more broadly today. The SPDR S&P 500 (NYSE: SPY) was up by a half point at midday, but looks to be getting lift since the 10:00 AM reporting of the better than expected ISM Nonmanufacturing Index more so than this data. Still, the shares of major mortgage lenders including Bank of America (NYSE: BAC), Citigroup (NYSE: C), J.P. Morgan Chase (NYSE: JPM) and PHH Corp. (NYSE: PHH) were posting outsized gains of 0.8% to 2.5% through midday, so it appears the news was noticed by smart money.

Mortgage applications filed for home purchases also increased in the reported period. Both the MBA’s seasonally adjusted and the unadjusted Purchase Index increased 4% against the prior week. The index was also higher by 11% over the prior year period. Short-term changes in rates will have a less important impact on purchase activity, due to the relative illiquidity of the housing market and the time involved for the entire process, including decision making. That said, housing supply shortages are being reported in some regions now, and the surge of the publicly traded homebuilders has been well-noted. Lower rates can only help.

In the recent past, decreases in mortgage rates have had a subdued impact on housing and the cost of living, because a great many Americans purchased homes at the height of the housing boom from 2005 through 2007, and remain underwater today. However, if home prices continue to rise, an increasing number of homeowners will get their heads above water. This group of homeowners would benefit substantially from today’s record low rates, because the change incurred in their cost of homeownership and living could be substantial. Such change should also benefit the economy, since it would free up capital for consumption, investment and savings. Thus, it appears the Federal Reserve’s actions might finally bear significant fruit.

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.