If the housing recovery is on such solid
footing, why are many homebuilder stocks already in or
approaching bear market territory?
Would you believe that since May 2013 the SPDR S&P
Homebuilder ETF (NYSEARCA:XHB) has lost over 12% of its value and
the iShares Dow Jones U.S. Home Construction ETF (NYSEARCA:ITB) has
fared even worse, losing over 20% of its value in only three
It gets worse.
REITs, such as the Vanguard REIT ETF (NYSEARCA:VNQ) and the
iShares FTSE Mortgage REIT NYSEARCA:REM) are in a similar boat,
down 20% over the same three months?
What exactly is going on with the housing stocks, and are they
warning us something more sinister is brewing in housing's
The Real Housing Barometer
In March 2013 something happened to the housing industry, but
almost nobody noticed.
Lumber prices peaked that month at over $400 per contract.
Since then lumber prices have been in a near freefall, falling over
25% to below $300 through summer. At around $320 today,
lumber prices are down significantly from their peak price earlier
this year, and that continues to worry us about the housing
Lumber has its ups and downs just like any market, but generally
it is considered a leading indicator to the housing market since
it's a key input ingredient.
There also is empirical evidence that supports lumber's
importance to the housing market, as significant declines in lumber
prices have preceded all the major declines in housing related
equities since 2005.
This is why on 5/15 I wrote an article entitled, "
when the iShares Home Construction ETF (NYSEARCA:ITB) was still
above $25 warning of lumber's freefall and how it compared to the
freefall that also preceded the homebuilder's bear market of
Selling anything related to housing after such a large decline
in lumber prices was the right thing to do in May, but is it still
the right thing to do now?
For more on lumber's role in housing stocks see our video on
lumber and the homebuilders
What about the Fundamentals?
If one ignores the news media and actually looks
at the data, the only thing remotely positive about the housing
situation is its price index rising and some markets' re-emergences
as "hotspots for flipping and all-cash offers".
Most of the actual fundamental housing data such as new housing
starts, mortgage applications, and single family housing
transactions remain well below any of the levels seen in the 2000s
(their current levels actually correspond to the levels last seen
during the 1990's recession).
The chart below is one I initially included in a follow up
article to "Timber" entitled "Genuine Housing Recovery or Relief
Rally?" published 5/29 and is updated through August showing a few
of these housing data points.
For larger image of the chart,
Notice that housing's price index is only back to 2004 levels
and that at the bottom, the last few months housing transactions
and new starts have actually started to decline again, something
lumber prices warned us of.
More specifically, along with the recent 25% rise in long term
interest rates, single family home starts have actually been
declining since February, weekly mortgage applications have been in
freefall since June, and month over month home prices are now
decelerating, not increasing as they were earlier this year.
Fundamentally, housing's recovery is not on solid
Homebuilders Show Significant Relative Weakness
Homebuilder stocks have also been showing significant relative
weakness to the rest of the equity markets.
Compare the 30%+ declines in the housing stocks such as Lennar
), KB Home (
), and DR Horton (
) to the broader stock market (NYSEARCA:SPY) that is only down a
few percent from its recent peak, and the housing industry seems to
be in real trouble.
Couple this with some bearish technical setups subscribers of
Profit Strategy Newsletter
have been provided and the recipe is in place for a continued
decline in the housing sector.
Some of the setups we are following can be taken advantage of by
buying the ProShares Short Real Estate (NYSEARCA:REK) and also by
buying puts or opening shorts on the homebuilders, construction
stocks, and REITs (NYSEARCA:RWR).
We continue to think the best days are behind the housing sector
and suspect that equities related to the sector could have another
big move down as the fundamental data continues to play catch up to
what the lumber and equity markets already know.
The ETF Profit Strategy Newsletter uses unbiased technical,
fundamental, and sentiment analysis to decipher what the markets
are really trying to tell us. Right now homebuilder equities
are providing us warning signs that all is not well, regardless
what the media and other vested interest groups are trying to
convince you regarding housing's recovery.
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