Check out this graph showing an apparent breakdown in the longstanding correlation between the relative performance of homebuilder stocks and the trend in mortgage applications.
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from Monday August 30th Barrons on Line
'The Trader Column'
The chart on this page comes by way of Michael Panzner, a veteran Wall Street trader and writer on the stock-market. It shows an apparent breakdown in a longstanding correlation between the relative performance of homebuilder stocks and the trend in mortgage applications.
It's not clear what to make of it just yet, but on the surface it raises questions about whether underlying demand for new homes remains as strong as the stocks now imply. The homebuilder stocks, of course, have been a fierce battleground between bears who've been screaming of a housing bubble for at least two years, and fans of the companies enamored of their market-share gains and growth profile.
Yet there need be no national housing bubble for these companies to suffer a slowdown in demand. New-home sales in July were reported to have fallen to a 1.12-million-unit annual rate from a downwardly revised 1.21 million in June.
Higher mortgage rates, the presumed eventual killer of housing, still remain low by historical standards. But the broad consumer slowdown may be a drag on sales of homes after a three-year boom.
The favorable case for homebuilder shares is by now familiar. Big, publicly traded builders have more capital and are gaining share from small developers. Housing affordability remains high in most areas, demographic trends favor homeownership and the stocks -- based on published forecasts -- are cheap, with single-digit price-earnings multiples across the board. Even those in the housing-bubble camp leave open the prospect that one, final frenzy of home-buying activity is imminent, which would cap the trend.
The companies continue to put up gaudy earnings numbers, for now. Toll Brothers last week handily beat analysts' profit forecasts and promised 20% revenue growth in 2005. Yet, tellingly, Toll Brothers shares spiked higher on the news Wednesday morning and then immediately traded lower for the rest of the week.
The group has been heavily shorted for years, to the enduring pain of short sellers -- until recently, when the stocks have stalled and pulled back a bit. Yet sentiment has turned more positive on the sector, often a warning sign. Schaeffer's Investment Research notes bullish call options have become more popular of late. And sell-side analysts remain staunchly behind the stocks.
It might not be a solid enough bear case to bet the house on, but at least it seems worthwhile to heed the warning signs before buying in. |
