A Double Whammy for Homebuilders

by Ethan Roberts | December 15, 2011 2:45 pm

A Double Whammy for Homebuilders

Last week I wrote about two homebuilding stocks[1] that I felt were showing stronger relative strength than their peers and have been outperforming the S&P 500 as of late. Those two stocks are Ryland Homes (NYSE:RYL[2]) and Beazer Homes (NYSE:BZH[3]).

However, it seems as if every time the slightest bit of sunshine comes along for the real estate market, a dark cloud quickly covers it. As my previous story explained, the group was clearly overextended and ready for a pullback to make them more attractive.

And sure enough, this week landed a one-two punch of reports that pummeled this sector in its entirety — and triggered the start of the pullback I was expecting.

On Monday, KeyBanc Analyst Kenneth Zener downgraded both Toll Brothers (NYSE:TOL[4]) and Lennar (NYSE:LEN[5]), from buy to hold, expressing pessimism about the homebuilder sector for 2012. Weaker employment numbers and an end to government stimulus plans were two factors cited for the downgrade. Zener also noted the recent run-up in these stocks’ prices as cause for concern.

Following the downgrade, most of the homebuilder stocks were down 2% to 3% on the day. But that wasn’t the only blow.

On Tuesday, the National Association of Realtors (NAR) announced that it has been incorrectly reporting home sales numbers since 2007 (which just happens to be the year the real estate bubble burst), and all of those numbers will need to be revised lower. NAR will issue a full report on the revisions next week.

Given that NAR is the country’s largest real estate organization in the country — and responsible for the industry‚Äôs most important data keeping — how could this happen, and what are the repercussions for investors?

According to NAR spokesperson Walter Maloney, “We’re capturing some new home data that should have been filtered out, and we also discovered that some properties were being listed in more than one list.”

In other words, NAR was counting some sold properties more than once, and even new-home sales were sometimes added to the mix. But NAR is supposed to report only existing-home sales in its data.

Although new-home sales and existing sales are two different entities, a strong existing-sales report usually indicates better numbers for the homebuilders as well. Therefore, any downward revisions to existing sales are sure to hurt the value of the homebuilder stocks as analysts revise their expectations.

Another group that could see their prices falter from the revised sales numbers is the home improvement stocks, such as Home Depot (NYSE:HD[6]) and Lowes (NYSE:LOW[7]). If analysts’ 2012 projections for these companies were based on more upbeat home sales data, they may want to take another look at the home improvement companies, as well as building materials stocks such as Beacon Roofing Supply (NASDAQ:BECN[8]) and USG (NYSE:USG[9]).

Both Ryland and Beazer Homes have now pulled back considerably from their recent highs on the heels of these two reports, and are more attractive at these levels than they were last week.

Roberts RYL 12 15 300x273 A Double Whammy for Homebuilders
Click to Enlarge

Courtesy of stockcharts.com

However, with the full NAR report coming out next week, it would be prudent to wait at least until then before purchasing any homebuilding stocks. Furthermore, with declining stochastic and RSI indicators, and now a MACD sell signal (see RYL chart), it looks like more selling could be the next step for this beleaguered sector.

 

 

 

 

Endnotes:
  1. two homebuilding stocks: http://investorplace.com/2011/12/homebuilder-stocks-buy-ryl-bzh/
  2. RYL: http://studio-5.financialcontent.com/investplace/quote?Symbol=RYL
  3. BZH: http://studio-5.financialcontent.com/investplace/quote?Symbol=BZH
  4. TOL: http://studio-5.financialcontent.com/investplace/quote?Symbol=TOL
  5. LEN: http://studio-5.financialcontent.com/investplace/quote?Symbol=LEN
  6. HD: http://studio-5.financialcontent.com/investplace/quote?Symbol=HD
  7. LOW: http://studio-5.financialcontent.com/investplace/quote?Symbol=LOW
  8. BECN: http://studio-5.financialcontent.com/investplace/quote?Symbol=BECN
  9. USG: http://studio-5.financialcontent.com/investplace/quote?Symbol=USG

Source URL: http://investorplace.com/2011/12/a-double-whammy-for-homebuilders/
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