Could Uncertainty Crush Housing Stocks?

by Ethan Roberts | October 17, 2013 2:34 pm

housing stocksHousing stocks like Toll Brothers (TOL[1]), Lennar Corp. (LEN[2]), D.R. Horton (DHI[3]), Ryland Group (RYL[4]) and KB Home (KBH[5]) might have made some gains today, but they have been steadily falling over the past several months.

Unfortunately, it seems likely that uncertainty could send housing stocks down even further.

If there’s one thing that Wall Street hates, it’s uncertainty — and this isn’t true for just housing stocks like LEN and KBH. Just look at the day-to-day flip flopping of stock prices over the most recent week, as Wall Street sweated out whether the government shutdown would continue or not.

But for housing stocks in particular, the shutdown and uncertainty are even bigger factors. For one, investors had to rely on the estimated housing starts data this morning. The estimated data for housing starts was reported by the National Association of Home Builders (NAHB), as the official Census Bureau numbers were unavailable due to the government shutdown.

The NAHB is estimating that housing starts will “approach 900,000 units in September,” with an actual range of 875,000 to 900,000 units being reported. The breakdown of single-family unit housing starts was 620,000 to 630,000, while multi-family construction was estimated at 255,000 to 270,000.

David Crowe, the chief economist at NAHB, spoke optimistically about housing starts, saying:

 “Interest rates remain near historic lows and we don’t expect the level of rates to have a major impact on sales and starts going forward. Once this government impasse is resolved, we expect builder and consumer optimism will bounce back.”

But just a day ago, the NAHB reported confidence levels among homebuilders had slipped from 57 to 55 — the lowest levels since June. If housing starts are so strong, why would the confidence be slipping?

That is a contradiction that needs some further investigation.

Add to this morning’s weekly jobless claims number of 358,000 that exceeded estimates of 330,000, and you have an uncertain and tough environment for housing stocks going forward.

As I mentioned earlier, housing stocks have been steadily falling over the past several months after posting blistering gains of 200% or more in 2012. In fact, KBH stock and DHI stock are down around 30% since May, despite favorable housing reports throughout the summer.

Ryland Homes stock has exhibited the strongest relative strength over the past month until today, with shares of RYL lower by only 1% or so. By contrast, DHI stock was down over 9% and both KBH and TOL were down over 4%.

Housing stocks did gain ground after NAHB estimate today, but I wouldn’t be surprised of the actual numbers were revised downward at a future date … which could adversely affect earnings for housing stocks.

And at this point, the best that can be said for housing stocks is that there is certain to be uncertainty in the near future — and that could be bad news for big names in the sector.

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

  1. TOL:
  2. LEN:
  3. DHI:
  4. RYL:
  5. KBH:

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