Homebuilders: Building Permits And Housing Starts Spoil The Party

| About: SPDR Homebuilders (XHB)

Summary

Housing starts came in at 1089 versus 1170 expected.

Building permits were expected to rise but fell about 7.7%.

The bull case is not strong enough to convince me of another extended rally after a 25% surge since the February lows.

Building permits are a leading indicator for the next few months and do not show the long term picture.

Building permits were expected to hit 1200K in March. Up from 1177K in February. Permits not only missed estimates but declined and ended at 1086K. It is still a year-on-year increase of 4.62%.

Housing starts however were expected to drop towards 1170K units. The number came in lower than expected at 1086K. The year-on-year increase is a remarkable 14.15%.

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Homebuilders looked really cheap in February and March. Since then, the SPDR S&P Homebuilders ETF XHB has rallied over 24%. In other words, homebuilders soared twice as much as the S&P 500.

Now it looks like the party is about to come to an end. At least on the short term. Building permits indicate that there is about 1-4% upside on the short term. I won't take that risk after a huge rally and sell my D.R. Horton (NYSE:DHI) shares.

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Housing starts are a bit more optimistic. Homebuilders have about 10-15% more upside on the short term. However, housing starts are far more volatile and less reliable on the short term. A reason might be that every single apartment counts as a 'house' in these statistics.

Another thing I wanted to share with you is the ratio spread between the SPDR S&P Homebuilders ETF XHB and the SPDR S&P 500 ETF SPY. Homebuilders do not significantly outperform if building permits are strong. However, they underperform in times of declining growth.

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I am not interested in another long position in homebuilders at the moment. My time horizon is 3-6 months and therefore no indication for the long term. Is doesn't look like the long term picture is in distress. However, I don't see any short/mid term alpha performance if I buy homebuilders. The rally was amazing after a 25% sell-off from the all time high. And fundamentals are not strong enough to confirm a strong bull case.

Disclosure: I/we 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.