Everything has gone right for homebuilders for a long time. How much better can things get?
What Went Right?
- A hyperactive Fed with extremely loose monetary policy and repetitive rounds of QE until it finally ended on March 9th, 2022 the Federal Reserve conducted their final open market purchase.
- Mortgage rates ticked up, but that impacted existing home sales more than new home sales.
- Lumber costs which soared to the moon crashed back to reality. Having hit a high of nearly $1700 in May of 2021, prices crashed to $400 in January of 2023.
- Existing home owners who wanted to move were trapped, unable or unwilling to trade their 3.0 percent mortgage for a 7.0 percent mortgage.
- To keep the building game going, homebuilders built smaller homes, bought down mortgage rates, and cut back on luxury items.
DHI DR Horton Daily Chart
As Good as It Gets
Bloomberg comments Homebuilders Rally Stalls After D.R. Horton Disappoints Bulls
D.R. Horton, which targets the entry-level housing market where inventory scarcity is most pronounced, blew away estimates but fell short on bullish expectations for new orders, according to Wall Street analysts.
Amid a 48% rally in D.R. Horton this year, traders have been in no rush to pile on hedges to guard themselves against losses. Earlier this week, the cost of contracts protecting against a 10% decline in the stock in the next month relative to bets for gains of the same magnitude fell to the lowest level since March, data compiled by Bloomberg show.
Tyler Batory, an analyst at Oppenheimer & Co. commented, Investors “might make the argument this is as good as it can possibly get.”
Yes, that is exactly what I am suggesting.
Ring, Ring Goes the Bell
Lumber Futures
How much more lumber price cost reductions can homebuilders pass on?
Housing Starts
Building Permits
- Privately‐owned housing units authorized by building permits in June were at a seasonally adjusted annual rate of 1,440,000.
- This is 3.7 percent below the revised May rate of 1,496,000 and is 15.3 percent below the June 2022 rate of 1,701,000.
- Single‐family authorizations in June were at a rate of 922,000; this is 2.2 percent above the revised May figure of 902,000.
- Authorizations of units in buildings with five units or more were at a rate of 467,000 in June.
Housing Starts
- Privately‐owned housing starts in June were at a seasonally adjusted annual rate of 1,434,000. This is 8.0 percent (±10.3 percent) below the revised May estimate of 1,559,000 and is 8.1 percent (±9.2 percent) below the June 2022 rate of 1,561,000.
- Single‐family housing starts in June were at a rate of 935,000; this is 7.0 percent (±11.7 percent) below the revised May figure of 1,005,000.
- The June rate for units in buildings with five units or more was 482,000.
Housing Starts Dive 8 Percent in June On Top of Significant Negative Revisions
For more discussion, please see Housing Starts Dive 8 Percent in June on Top of Significant Negative Revisions
Pent Up Demand
I keep hearing talk from the NAR cheerleaders of pent up demand. Perhaps, but at what mortgage rate, and what price level?
Homebuilders were able to adjust to Fed rate hikes, but how more more low hanging fruit is left?
Meanwhile, there are significant signs of consumer stress.
Credit Scores Abruptly Plunge As Americans Stop Paying Down Debt; Synchrony Financial Warns
ZeroHede noted Credit Scores Abruptly Plunge As Americans Stop Paying Down Debt; Synchrony Financial Warns
“What we are seeing is people who are doing significant score migration — a 680 or a 690 going to a 620,” Synchrony Financial CFO Brian Wenzel said in an interview.
That’s a dive from good to fair.
Inflation-Adjusted Retail Sales Are Weak
On July 18, I noted Inflation-Adjusted Retail Sales Weak Four of the Last Five Months
It’s not just consumers.
The Fed Reports Abysmal Industrial Production Numbers and Negative Revisions Too
Please note The Fed Reports Abysmal Industrial Production Numbers and Negative Revisions Too
The Bloomberg Econoday consensus estimate was unchanged in May from June. Instead, Industrial production fell 0.5 percent and the Fed revised May from -0.2 percent to -0.5 percent.
Meanwhile, the consensus opinion has changed from recession to soft landing. Ring, ring goes the bell.
Which ones are you shorting Mish?
I’m not sure about shorting the builders, but technically DHI is up 20-25% from its last base (could sell… sell some). If your position trading, you could hold some shares until it closes below the 10-week MA line on above average volume of +30% or higher OR it closes for 3 consecutive weeks below that line on lessor volume (than +30%). At that point, it could be topping or starting to base again.
NOTE: This is only MY OPINION on how I would handle DHI- – everyone is responsible for there OWN trades/investments.
An example of the former happened to me this week in ASML. Sold it today because of the weekly price action. If it reverses back above the 10-week line I will reconsider it, as long as the 10- and/or 40-week lines remain in an uptrend.
I road the builders etf up for a little bit of this run and my trailing stop loss was recently hit. i let the market trade me, instead of me trying to become a fortune teller. probably the greatest insight i was given, as a young trader, from a young man doing his post doctorate in stats on markets was that earnings and prices are not positively correlated unless one holds for 15 or so long years. and as buffet explained in his letter circa 1999 bubble, it’s all about the flow of money creation…………how many you boys and girls remember that famous shareholder letter with his interview with bezos of amazon who called for a moratorium on earnings. ha ha. blew me away. rode that bubble up and trailing stopped out in early 2000. weeeeeeeeeeee, what a long strange trip……….
The notion of “pent up demand” is such a joke. Pent up demand is infinite. Limited ability to pay for what people want ensures that infinite demand will always be “pent up”.
And it’s a joke that all people, especially realtors, want to talk about is high mortgage rates. Nobody is screaming to see home values decline 20-25%. Disinflation in housing and other key sectors via a real recession is the only way the Fed will see 2% core PCE inflation again anytime soon. And letting 10M+ illegals stream across an open border certainly goes a LONG WAY towards ensuring there’s “pent up demand” in the rental market. The sheer number of unintended consequences from the Fed’s & Biden’s disastrous actions are too high to count.
Homebuilders is a sector I never invested in and I probably won’t start by shorting . Mish has a good nose for this so maybe a paired trade might be in order.
He is usually several years early. Might want to wait.
Not this time. Mish is nailing the timing on this one IMO and according to my Elliott wave models.
So which home builders are YOU shorting?
And which ones did you hold on the run up? Did your Elliot waves tell you which ones to buy and when to get in?
According to my “buy index funds when you have extra money and don’t sweat it” model, I retired at 40.
But you do you.
By the time the usurpers are put down and a functional economy can be put in place, there won’t be anyone left who knows how to build anything.
Toot toot! Kook alert!
Might be a good idea fundamentally. However, I would be rather cautious shorting any stock in this casino, excessive, momentum, FOMO driven market. Virtually bankrupt stocks are flying off the shelf. It will end but the timing is almost always a challenge to predict.
Who wrote the headline?
I dont see anything in the article about shorting anything.
Old school thinking typically calls for a top-tick around the last rate hike of the cycle.
Many pros have already made their book for the year; however there is always that greed thingy…
The real estate tax loophole not closed by Covid is allowing high income earners to move more quickly into real estate and replace their high income with more stable income. IMO, as long as this isn’t closed, you will see demand for real estate in some locales that turns more in demand places into rental properties and airbnb properties. And there will be more demand for workers in professions these people are leaving for good. We know of many folks in medicine doing this. At some point, most of these high income professions are going to just turn into a temporary job for people who want to be in control of their time. I see younger and younger people getting out of their professions and choosing to buy up real estate that can be rented. Effectively, the tax loopholes are feeding on themselves. Even in high tax states, it is allowing people to reduce their tax burden by 20-30% by running an LLC or small S corp. I predict at some point, government debt will become too high for the government to even make the interest payments. It will make 2007-2009 look like child’s play in terms of financial crises.
link to mishtalk.com
Not counting dividends, Lennar (just as an example) is up 150% or so since that was posted.
The world is a weird and unpredictable place.
DR Horton up like 300-400% in that same time. Ouch.
link to mishtalk.com
Ring, Ring Goes the Bell
link to youtube.com