The Wall Street Journal reports Home-Builder Shares Miss Out on Stock Rally

>Consumer confidence tracking near 18-year highs, strong corporate earnings and soaring retail sales haven’t translated into gains across the housing market—something that has kept home-builder shares from reclaiming the highs they hit at the start of the year.

>Even as the broader stock market has clawed its way back to all-time highs, big, publicly traded home builders have lagged behind, with shares of Lennar Corp. down 17% this year, D.R. Horton Inc. losing 12%, Toll Brothers Inc. down 23% and PulteGroup Inc. shedding 15%. In comparison, the S&P 500 is up 9% this year.

None of this is surprising given the housing data. Existing home sales are down for the fourth month. New home sales fell 1.7%. Mortgage rates are rising and the yield curve is flattening.

The question is "where to from here?"

Confidence? So What?

>“Confidence is soaring to new heights which makes us bullish on growth and forecasts that this expansion may indeed shatter records for longevity next summer,” said Chris Rupkey, chief financial economist at MUFG, in an email. “The consumer says the economic times we live in is better than you think.”

The obvious problem with the confidence theory is that reality doesn't match. Even with the surge in consumer spending on the heels of tax cuts, it did not translate into home sales.

Why?

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Affordability. Wages are not keeping up with inflation. And inflation is way understated because home prices, which have soared are not counted in inflation stats.

It will take a decline in home prices, lumber prices, and fixture prices to fix this problem.

Guess what? If all those happen, consumer confidence will not be so high.

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  1. New Home Sales Sink 1.7% to 627,000 Units: Builder Spec Homes Most Since 2009
  2. Flattening Yield Curve in One Picture
  3. Pre-Tax Corporate Profits Rise 0.2%, After-Tax Corporate Profits Rise 6.7%
  4. Existing Home Sales Decline Fourth Month

When people cannot afford to buy homes, they eventually stop buying them.

What took them so long?

Mike "Mish" Shedlock

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