Is the Homebuilder Rebound Over Already?

by Ethan Roberts | January 27, 2012 8:54 am

New home sales for December were reported Thursday, and the weak results caught many analysts by surprise. In fact, the 2.2% decline in December topped off the worst sales year on record, going all the way back to 1963.

Total new home sales for the year were only 302,000, a decline of more than 20,000 from 2010, and represented the third consecutive year of declining numbers. In addition, the median price for new homes also dropped in December, and now stands at $210,300.

Not surprisingly, most of the homebuilder stocks, which have surged lately, traded lower yesterday. Lennar (NYSE:LEN[1]), which I recently wrote about in this space[2], was down almost 3%. Other big losers were Ryland Homes (NYSE:RYL[3], -2.7%), D.R. Horton (NYSE:DHI[4], -2.5%) and PulteGroup (NYSE:PHM[5], -2.4%).

However, one homebuilder stock that bucked the trend yesterday was Hovanian Enterprises (NYSE:HOV[6]), which closed up 1.14%. HOV has been the recipient of some very heavy call option buying lately, and is worth keeping an eye on.

So is the recent rebound for homebuilders over?

In the short term, I would say it is. Most of the group is quite overextended, having advanced to very lofty levels recently. For example, PHM, which closed at $7.80 yesterday, could have been purchased for only $3.54 on Oct. 3, 2011. That’s a 120% gain in less than four months!

Click to Enlarge
Take a look at the chart for the SPDR S&P Homebuilders ETF (NYSE:XHB[7]). Notice that the 14-period RSI (a momentum indicator that measures both the speed and change of price in a stock), has begun to weaken, even though the price of XHB has peaked. This divergence often is a signal that a reversal in trend is coming soon.

Looking Forward

When LEN closed at $22.25 two weeks ago, I advised InvestorPlace readers to wait for a pullback. After reaching an intraday high of $23.11 Thursday morning in anticipation of a good sales report, it reversed course to close down at $22.13. I believe the pullback has only just begun, and there is ample time to get in at prices below $21.

However, I continue to like the homebuilders group for the long term, and would be a buyer on any decent pullback. Despite yesterday’s weak numbers, there still are many positives, such as:

  1. Recent talk of Fannie Mae selling bulk numbers of foreclosures to private real estate hedge funds to create rental properties. Foreclosures have been killing the new home industry for several years, as buyers often can snap up homes that are only four or five years old for 30% to 40% less than new home prices. Bulk sales will deplete the foreclosure inventory.
  2. Despite the poor December numbers, total sales for the fourth quarter were up.
  3. Mortgage interest rates continue at historically low levels, with the national average of the 30-year fixed rate around 3.9%.
  4. Consumers are beginning to realize that the monthly payment for renting is now higher than for buying a home in many areas. Many say they are now considering buying a home in 2012, and recent existing home sales reports have been better.

Homebuilder success and the unemployment rate will continue to be closely linked together as 2012 progresses. The next jobs report is due Feb. 3, and that might have a big effect on real estate-related stocks.

Economists say we need about 700,000 new home sales annually to indicate a healthy economy. But the problem is that while home sales create jobs, jobs also create home sales. So when either half of the equation suffers, we create a Catch-22 that makes it difficult for the economy to excel.

Until we see real growth in employment numbers, I would not chase the homebuilder stocks at current levels. But I still believe there is significant value in these stocks for the long term when purchased on pullbacks to their 50- or 200-day moving averages.

As of this writing, Ethan Roberts did not hold a position in any of the aforementioned stocks.

  1. LEN:
  2. I recently wrote about in this space:
  3. RYL:
  4. DHI:
  5. PHM:
  6. HOV:
  7. XHB:

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