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Homebuilders Get Demolished – Time to Buy?

The first two weeks of March have seen several real estate stocks pull back 10-20%

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Heavy short interest is one of the major culprits (38% of KBH’s float is held short). Another factor was the National Association of Realtor’s pending existing home sales for January, which was basically flat from December, but 9% below pending sales from a year earlier.

Most of the recent bad reports have been blamed on poor winter weather in the Northern states. However, there is real concern among realtors and mortgage brokers in the real estate industry that a genuine slow down in the market is occurring, irrespective of the recent weather. Steep layoffs in the mortgage departments of both Bank of America (BAC) and Wells Fargo (WFC) recently are confirming this anxiety.

Articles in the media citing the inability of the Millennial generation to purchase a home are now becoming more commonplace. Negative factors such as job downsizing, little-to-no savings, heavy student loan and other debts are impeding this generation from leaving their parents’ homes. And that’s bad news for homebuilders.

Higher insurance payments or increasing deductibles from the ironically named Affordable Health Care Act also have the real estate industry worried about millennials’ ability to afford down payments and closing costs on home purchases over the next few years.

As a result, investors have been bailing out of homebuilders and increasing their short positions within the last few weeks.

But is this pullback a buying opportunity, or the beginning of a larger decline? I believe that with the presently oversold condition of these stocks, we will soon see a brief retracement of some of the losses, but it is doubtful that homebuilders will return to their previous highs.

Therefore, homebuilders have now become a trading sector, rather than a long-term investment until things improve in the industry. However, there is one exception. Toll Brothers (TOL) is showing strong relative strength within the homebuilder sector right now.

But even this company, which specializes in “step-up” homes for higher-income earners, could face major difficulties down the road if there are fewer first-time buyers to purchase homes.

My recommendation for long-term investors is to continue to avoid homebuilders. But short-term swing traders may want to consider buying calls or selling puts in anticipation of a short-term bounce. I certainly don’t see this as the pause that refreshes for homebuilders, and I’m not looking for any lambs or bulls to come out of hiding any time soon.

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

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