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The One Housing Indicator You Shouldn't Ignore

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September 4, 2013
Chad Karnes, Chief Market Strategist

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 months!

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 “recovery”? 

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 market. 

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, “Timber” 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 2011.

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.

 

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 ground.   

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 Corp (NYSE:LEN), KB Home (NYSE:KBH), and DR Horton (NYSE:DHI) 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 the ETF 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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CommentsAdd Comment

Yara said on October 01, 2013
  To answer your quoseitn first, I do believe that the action in the VIX going into the close has a tendency to be exaggerated during sharp market moves, particularly when the broad market indices are falling rapidly.While various types of portfolio protection can be purchased around the clock, those looking to buy put protection via SPX puts have until the close of index options trading (4:15 p.m. ET) to do so -- at least in the most liquid market environment.In my opinion, anyone who postpones buying put protection until the end of the day "to see how bad things get" is likely to be less price sensitive just before the close and be more concerned about filling an order than getting it at the best possible price -- or not at all.Regarding yesterday's VIX, it was strangely unfearful, particularly during 12:30 - 1:15 p.m. ET, when the SPX sold off fairly substantially, while the VIX hardly moved.Cheers,-Bill
 
 
Fayza said on September 30, 2013
  I would recommend contvreing the money into ringgit and making a deposit with a reputable Malaysian bank like Maybank. The current interest rate for a 1 year deposit is 2.25% to 2.50%. This is significantly higher than S$ deposit rates.The ringgit is a relatively good currency to put some surplus funds into given the proximity of Malaysia to Singapore. In the event the ringitt depreciates vis-a-viz the Singapore dollar, you can easily cross the border and covert the ringgit into goods and services. There is usually a time lag before changes in the exchange rate translate to a change in actual good and services. You can therefore cross the border and minimise any losses by consuming Malaysian goods and services. Also it should be noted that Malaysia is a huge raw material exporter. If there is a signficant increase in the price of raw materials like oil, rubber and tin, the Malaysian ringgit will tend to appreciate vis-a-viz the Singapore dollar. Many expect that this will eventually happen if the US continues to print money and the world faces higher inflation.
 
 
flyingck said on September 24, 2013
  The truth is that the 10% of those who control the money will manipulate the market to their advantage, too bad I fall in the 25% and thus receive the royal @*#$^&* ing. It doesn't matter if it is investment accounts or housing. no @#$%&* way I retire in this country.
 
 
Bozo said on September 04, 2013
  I like to buy timeshares for dollars and the penny and sell them for pennies on the dollar.
 
 
grant8 said on September 04, 2013
  Hello Chad, I specifically recall that lumber article in the spring and appreciate you mentioning it again. I was watching the same thing wondering...what in the heck is going on? why isn't anybody else talking about this? I did not own the homebuilder ETF but I did have a small position in LEN, which I liquidated for a modest gain. I don't see anything but trouble brewing in the housing sector from this point forward.

LIONCA, good points and welcome to the board.
 
 
LIONCA said on September 04, 2013
  And without the government's propping up the US housing market it would be in shambles. But they can only keep gaming home prices for so long before the truth comes to light. Govt. has it's hand in too many cookie jars. The next housing downturn will be worse than before. Just wait.
 
 
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