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Homebuilder sentiment is strong. Single-family housing starts are rising. Home prices are in a reinflated bubble.
Recent housing data has been positive.
The National Association of Home Builders Housing Market Index slipped by one point in February to a still extremely elevated reading of 74, well above the neutral reading is 50. The last three monthly readings are the highest levels since December 2017.
Single-family housing starts decreased by 5.9% in January to a seasonally adjusted annual rate of 1.01 million units. Despite this slip single-family starts have been above one million for the second month in a row.
Despite these positives, homebuilders are concerned about excessive regulations, labor shortages and rising materials costs.
The Graph of the NAHB HMI versus Single-Family Starts
Housing Sentiment Vs Single-Family Starts
National Association Of Home Builders
This graph is not as bullish as it seems! Note that at the mid-2006 high for single-family sales that sales of 1.8 million units was well above the sentiment reading of just above 70. Today’s reading for sales is almost half of its potential given the near-record reading for sentiment. That’s the widest gap between the two measures since the data series began in January 1985.
A sign of overall weakness in housing is that existing home sales declined in January. Sales came in at an annual rate of 5.46 million units. Despite the lowest mortgage rates in more than three years, the 5.5 million threshold has been a barrier since the Great Recession.
The S&P CoreLogic Case-Shiller Indices
Follow The 20-City Composite
Case-Shiller Home Price Indices
The latest reading is for November 2019. The 20-City Composite is up 2.6% year-over-year from 2.2% in October as the home-price bubble continues to reinflate. The three leading cities are Phoenix, up 5.9%; Charlotte, up 5.9%; and Tampa, up 5%.
The chart shows that home prices peaked in July 2006 and declined by 35.1% to a cycle low in March 2012. Since then the home-price bubble reinflated by 63.1%. This reading is 5.9% above the July 2006 high. This questions home affordability. Household incomes did not match this rise since March 2012 and household debt rose to record levels of 14.15% at the end of 2019.
Here’s a Scorecard for the Five Major Homebuilders
Five Major Hoebuilders
Global Market Consultants
A major problem for homebuilders as an investment is their elevated P/E ratios. History says you can own homebuilder stocks when their P/E rations are under 8.00. Today, they range between 12.00 and 14.00, which is a reason to book profits now.
DR Horton (DHI): Sell this stock down to its annual pivot at $58.05 after it set an all-time intraday high of $62.54 on February 18.
KB Home (KBH): Sell this stock down to its semiannual pivot at $38.24. The stock is 53.4% below its all-time intraday high of $85.45, set in July 2005 when the housing market peaked.
Lennar (LEN): Sell this stock on strength to its annual risky level at $75.17 down to its semiannual pivot at $38.24. This stock set its all-time intraday high of $71.87 on January 19, 2016.
PulteGroup (PHM): Sell this stock down to its annual pivot at $45.47. The stock is 3.8% below its all-time intraday high of $48.22, set in July 2005 when the housing market peaked.
Toll Brothers (TOL): Sell this stock on strength to its annual risky level at $52.44. The stock is 18.5% below its all-time intraday high of $58.67, set in July 2005 when the housing market peaked.
How to use my value levels and risky levels:
The closes on December 31, 2019 were inputs to my proprietary analytics. Quarterly, semiannual and annual levels remain on the charts. Each uses the last nine closes in these time horizons.
Monthly levels for February were established based upon the January 31 closes. New weekly levels are calculated after the end of each week. New quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year. Annual levels are in play all year long. My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in.
To capture share price volatility investors should buy on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before its time horizon expires.
Want to learn how to integrate trading levels into your everyday trading strategy? Check out my new publication, 2-Second Trader.