Another improvement in the homebuilder view, and the housing stocks rallied some more last week. That said, I'm here to tell you it's time to get out of these names before they hurt you. My reasoning is that things are not as wonderful as the popular press is pumping, and the economy is about to face another major stumbling block on top of that, if not two.
The real estate outlook is hopeful without a doubt, at least if you listen to the popular press. The latest months' slew of housing reports offered hope, but I continue to say be careful where you tread. Housing growth has been largely driven by multi-family projects, not single family, as the old American dream of homeownership is replaced by a renter nation. What more would you expect after the debacle that unfolded last decade. Mortgage loans are not quite so easy to qualify for these days, especially if you've lost your job and income stream. The latest Housing Starts data showed some retracement month-to-month, but the evidence is clear in the yearly comparison, which shows a 69.1% increase in multi-family starts.
So when the National Association of Home Builders (NAHB), a biased group mind you, reported its Housing Market Index (HMI) Wednesday, I could not help but to roll my eyes. That's because the media was talking about the improvement in the homebuilder mood, and not the fact that at a mark of 25, the HMI is still pathetically short of the sentiment break-even point of 50. That's where more builders hold a positive view than a negative one. Contemplate now, for a moment, just what the ratio is between positivity and negativity if the number is 25.
I'm the first to talk about the importance of directional change in trend, but we are still way too deep in trouble for this rally to not lose its traction. It's simply not built on a solid enough economic foundation, and that foundation is about to face two new tests to it.
The HMI marked its fourth straight monthly gain in reaching a point not seen since June 2007. The upbeat NAR spokesperson attributed the gains, which were marked across all measurements and regions, to nascent employment and consumer improvements. Well now, if you've been reading along my humble column, you know by now how I feel about that charade. You'll note the usual complaints as well from the vested NAHB regarding tight lending standards and burdensome appraisal values, as the group seeks an improved operating environment for the industry.
A closer look at the HMI report shows a heavy contribution to the December gain came from expectations, which is always troubling to me and unreliable to the rest of you. The component measure of current sales conditions improved three points on its way to a mark of 25. Meanwhile, the measure of sales expectations for the next six months improved three points in its reaching a reading of 29. However, when you look at real foot traffic, that component measure that counts the actual traffic of prospective buyers marked 21, though it was up 3 points from November. You can see here that builders are more hopeful than satisfied; in fact, they remain quite unsatisfied with the state of affairs in real estate.
Housing stocks were up again last week on this news, and are significantly higher on the year. The SPDR S&P Homebuilders (XHB) is up 8.8% just since the turn of the year, and it's up 48% from its October 3rd close, where the industry troughed last year. Some of the individual names have marked even larger percentage gains. For instance, penny stock, Hovnanian (HOV) is up 129% from its October low close through Monday. On the other end of the spectrum, the stock that Jim Cramer and I view as the class of the industry, Toll Brothers (TOL), is up 62% from early October.
Yet, while message boards are engaged in warfare between the housing longs and shorts, and against the grain of momentum, I'm warning to look out for cracks in the foundation of this nascent rally. If not for the dynamics of 2012 playing out across the global spectrum, I would have kept with my early 2011 call to buy the homebuilders. That's when I said very clearly that the homebuilders were set to soar. However, we must look ahead toward what is developing, and what I see is a stumbling block at minimum for the U.S. economy, based on two very current and tangible issues.
Europe is headed into recession, if not worse, and the Iranian situation is finally coming to a head after years of stewing. I've outlined the importance of Europe to the U.S. economy in a recent article here. Some 20% of American exports are directed to Europe, where buyers are getting scarcer. As for Iran, I simply cannot imagine the proud Persian nation backing down from its decades-long nuclear effort. Nor can I imagine the oil embargo the West is employing going without significant countermove from Iran, or defining development involving China or Russia in Iran's favor. Both of those options are unsavory for stocks in my view, and should add lift to oil and commodity prices. With those sorts of macroeconomic risks, carrying significant probability mind you, I expect high beta, cyclical names that have recently enjoyed gains will retrace a bit.