Homebuilding Stocks Surge Despite Plunging Sales

New home sales continue to plummet. According to the joint release issued yesterday from the Census Bureau and the Department of Housing and Urban Development, only 51,000 new single-family homes were sold in March in the entire country. Seasonally-adjusted and annualized, that comes out to about 526,000 new home sales, down 8.5% from February and down 36.6% from March 2007. Because the 90% confidence level is ±11.1%, it is possible that the decline was much worse. We'll find out for sure over the next two months as this figure is revised.

If that's not bad enough, it turns out that inventory is still growing. If sales stopped falling and homebuilders stopped working, there would still be enough new homes available for sale to satisfy demand for 11 months. Furthermore, the median price of a new home is down 6.8% over the past month and down 13.3% over the past year.

Despite this seemingly dismal news, almost all homebuilding stocks were up yesterday. Although most homebuilding stocks are down by huge amounts over the past year, they are also some of the best-performing stocks year to date. At least three of them, Hovnanian Enterprises (HOV), Standard Pacific (SPF) and M/I Homes (MHO), are up more than 50% so far this year.

Many investors are obviously betting that the worst is over for the homebuilders. I doubt this is the case. Most of these companies will report huge operating losses this year. Indeed, they may report losses next year as well, assuming they survive that long. While some may consolidate, others will go out of business. At current prices, it's still too early to buy the homebuilders.

Comments

[stefaith]

Yesterday's market action was so irrational, it defies belief. On the day that several builders released abysmal quarterly results, and new home sales were reported as the worst ever, the builders rallied hugely. It may well be that builders are undervalued, though I doubt it, but if indeed they are, why did they rally yesterday in the face of so much bad news?

It is said that homo sapiens is a rational animal. After yesterday, I wonder if that hypothesis can be considered valid.

[Kunst]

About time to go short homebuilders again.