Housing stocks burst higher Tuesday, just as I predicted, but be careful, because it was on the strength of dated data. Given that the Federal Reserve has presented us with a new paradigm for stocks, I would use Tuesday's strength and any further strength this week to sell.
Three positive data points Tuesday, including one spectacular report, restored strength to housing stocks. The S&P Case Shiller Home Price Index led the real estate wire, showing a significant increase in home prices in April. Add to that positive news from the FHFA House Price Index and the New Home Sales Report, and you had reason enough for investors to doubt recent declines in housing shares. Homebuilder shares have been giving back their year-to-date gains, but they still have significant returns booked over the past year.
1 Year Performance
Standard Pacific (NYSE:SPF)
K.B. Home (NYSE:KBH)
The S&P Case Shiller 20-City Composite measure showed home prices were 2.5% higher in April and 12% greater than the year ago period. The increase was a full point better than the economists' consensus expectation. All of the cities measured posted year-over-year increases for at least the fourth consecutive month. And on a monthly basis, only Detroit saw a decrease in its average new home price in April. Obviously, this was great news, though we want to keep in mind that April is the heart of the spring selling season, and June and July present significantly different environments if mortgage rates continue on their steep trajectory.
The FHFA House Price Index concurred with the message offered by S&P Case Shiller. The FHFA measure showed a 0.7% increase in home prices for April. That was short of the economists' consensus expectation for a 1.2% increase, but the result was affected by an adjustment higher in March to 1.5% growth from the initially reported 1.3% pace.
New Home Sales were reported for the month of May, which was far more relative considering it was the month when mortgage rates began to increase. However, new home sales also improved, with the annual pace of sales rising to 476K in May, from 466K in April (revised). The April figure was ratcheted up from 454K. Economists were only looking for a sales pace of 460K, so a third solid data point confirmed the other two and helped the housing sector higher.
However, something telling happened with the stocks as the day progressed. They gave back the bulk of their gains by the close. It was a sign that market confidence is lacking moving forward, and it also reflected the fact that another recently critical data point will be reported tomorrow.
On Wednesday, we will receive the latest mortgage activity data from the Mortgage Bankers Association. It has, for a month and a half now, shown steadily rising mortgage rates and steadily declining mortgage activity. The mess has mounted for both refinancing activity and for mortgage applications for the purchases of homes. I have been documenting the decline from the start, as I follow the data point weekly. I expect that it will once again show the same trend ongoing and potentially set these stocks in their rightful place. Concern about this is probably the reason housing stocks gave back so much ground through the day.
Moving forward, thanks to the Federal Reserve and what I believe is the premature tapering of its asset purchase program, a new paradigm is set forth for investors. It is an unfavorable environment for stocks, especially homebuilders. The investment community, whose opinion is reflected in the movement of securities markets, also seems to see the Fed action as a mistake and premature. The reason for this is because of various economic signals which have flashed warning signs over recent months both domestically and abroad, and also on ongoing issues in the labor market, all of which I have covered in my column. While the Fed's economic forecasts are sanguine, the forecasts of other institutions like the Conference Board and World Bank do not agree. As I have discussed in recent work, the Fed seems to have made no adjustment for the Sequester spending cuts or the expiration of the payroll tax break.
Therefore, given an economy and real estate market that would seem to still need the creative supports provided by the Fed over recent years, and the fact that the Fed is pulling them away, we have reason to suspect both the real estate market and the broader economy could be detrimentally impacted. Thus, the favorable data being reported this week is inconsequential because it is dated and because the future offers a significantly altered operating environment.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.