Five Signs That Housing Market Recovery Is Caving In

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The stocks rallying on good news is normal. Rallying on bad news means it's climbing the proverbial wall of worry and looking ahead to better days. So what portends when it dives on good news? Run while you can still get out alive. Company news and earnings are always positive at height of the market and everyone thinks this time it's different.

Such is the case with homebuilder shares. The former high-flying iSharesDow Jones US Home Construction ( ITB ) andSPDR S&P Homebuilders ( XHB ) led the losers list Thursday, collapsing 3.37% and 1.39% while the benchmark SPDR S&P 500ETF ( SPY ) ticked higher 0.25%.

Shares caved in even thoughD.R. Horton ( DHI ),MI Homes ( MHO ), Meritage Homes (MTH) and Ryland (RYL) all eclipsed Wall Street earnings expectations when they reported Wednesday and Thursday. OnlyPulteGroup (PHM) missed views although earnings doubled and sales climbed a notable 20% year over year.

Homebuilders failed to follow the market higher after the June swoon. In the past three months, ITB tumbled nearly 10% and XHB 2% while SPY added 6.6%. This foretells the housing rebound faces demolition because the stock market looks forward.

Unsustainable Recovery

The housing recovery was artificially fueled entirely by the Federal Reserve's easy money policies and economic stimulus programs, says economist Harry Dent, founder of HS Dent, a research firm in Tampa, Fla.

"That has averaged about $2 trillion a year (that's $1 trillion in monetary stimulus and $1 trillion in fiscal deficits)," Dent wrote. "Money is not lent and invested in real future growth. Instead, banks, investment banks, and brokerage firms use it for speculation, often at very high leverage. And recently money has been flowing into housing speculation -- surprise, surprise."

Young families looking to buy their first homes can't compete with deep-pocketed institutional investors.

"Today's young people can't do that because they're hanging by their toes, strung up with unprecedented student-loan debt and facing tougher lending standards," Dent wrote in a note Thursday. "Unemployment is still high and consumer confidence has dropped sharply again."

The bull run that started in March 2009 will likely end between late 2013 to early 2015, Dent projects, noting that the average bull market lasts 3.6 years while the current one has gone on for 4.3 years. Very few have lasted longer than five.

PulteGroup and D.R. Horton tore down home builder ETFs in a productive session on the stock market today .

Homebuilders Stock Collapse

PulteGroup crashed 10.3% after missing analysts' second-quarter EPS missed forecasts despite doubling to 26 cents. Sales climbed 20% year over year to $1.28 billion vs. analysts' target of $1.39 billion. New orders fell 12% year over year. It lifted its share buyback by $250 million to $352 million. Sterne Agee cuts its price target to $26 from $32 although rating shares a buy.

D.R. Horton gapped down 8.6%. Earnings surged 110% to 42 cents a share, well above estimates. But cancellations rose and home buying tailed off as mortgage rates rose.

MI Homes fell 7.2% after reporting Q2 revenue vaulted 37% to $234.6 million, blowing away forecasts of $171 million. Earnings soared 47% to $0.25 a share.

Meritage Homes and Ryland both topped market expectations when they reported results after the close Wednesday. But shares sold Thursday, 3% and 5% respectively.

Taylor Morrison (TMHC) andKB Home (KBH) tumbled 6.8% and 6.7% respectively. Taylor reports Q2 results August 13. KB reports Q3 results in mid September. In late June it said it expects 2013 revenue will fall in line with analysts' forecasts at $2.1 billion to $2.2 billion.

Compass Point cut its price target onBeazer Homes (BZH), KB Home, Ryland andStandard Pacific (SPF).

Rising Interest Rates

Mortgage rates have followed Treasury yields higher since early May, when speculation grew that the Federal Reserve will begin to taper bond buying in the next few months.

Higher interest rates and rising home prices across the country will likely curb the housing market in the second half of the year, Fitch Ratings wrote in a statement Tuesday. "The large public builders are gaining share largely due to their land resources, liquidity and access to capital markets," the ratings agency wrote. "New home construction is gaining share of the total market as some existing homeowners remain reluctant to list and sell their homes."

D.R. Horton, as noted above, was among the first builders to acknowledge a significant negative impact from rising rates.

Housing Starts Tumbling

Housing starts dropped 9.9% month-over-month in June to their lowest level in 10 months mainly because multi-family housing construction fell 26.2%. Single-family homes, which makes up 70% of building activity, fell 0.8%. "Building permits dropped 7.5% during the month too, though single-family permits climbed to a new cyclical high," Yardeni Research reported last week.

New home sales for June showed a statistically insignificant gain after factoring in that the May numbers were revised lower by 3.6%, according to John Williams, an economist and founder of, who greets the month-to-month data with skepticism. "There has been no recovery. Although the existing home sales series shows some uptrend, the new homes activity statistically remains in stagnation, despite a minor uptrend in the monthly levels of activity," Williams wrote Thursday. "As of June 2013, existing-home sales activity still was down 30.1% from the June 2005 pre-recession peak. Given the volatility, instabilities and uncertainties in the compilation of the existing sales data, however, not too much can be read into the reported trends."

"Single-unit housing starts in June 2013 were 67.6% below the January 2006 pre-recession high," he added.

Bearish Stock Charts

ITB broke below key support at the 200-day line, confirming a trend change heading south. It has a weak IBD Relative Strength Rating of 35, indicating it's lagged 65% of the market in the past 12 months. Its E Accumulation/Distribution Rating is the lowest possible on an A-to-E scale. That signals institutional investors are heavily unloading shares and not buying.

XHB broke its 50-day line but still trades above the 200-day, indicating it remains in a weak uptrend. It has a stronger RS Rating of 52 and weak D- Accum/Dist Rating.

Follow Trang Ho on Twitter @IBD_THO

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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