Housing Stock Support Now Undermined

by: Markos Kaminis

Last week, we authored an article attributing the weekly decline in mortgage activity to the Super Bowl, and the tendency of Americans to celebrate the day like a holiday. We argued that, as with many three-day weekends, this would leave inadequate adjustment to business activity around the day. However, mortgage activity dropped again last week, for the period through February 17. Since the period fell between the Super Bowl and President's Day, something more than an anomaly is leading mortgage activity lower. This report, in fact, offers more evidence of the stall I've been warning about for housing, and so the hopeful support tenuously holding up the industry's shares is now disintegrating rapidly.

The Mortgage Bankers Association's Market Composite Index fell 4.5% in the week ending February 17. This week, the main driver of the dip in mortgage activity was a drop in refinancing, with the Refinance Index down 4.8%. There was some creep higher in mortgage rates, but not across the spectrum of mortgage loan sizes and types. I also do not see the creep in rates as enough to stymie activity. The effective rates on jumbo and conforming 30-year mortgages both edged slightly higher, while effective rates for 15-year mortgages and 5/1 ARMS also inched upward. Only 30-year FHA sponsored loans saw effective rate decrease, but the change was also insignificant.

The previous week's driver of decline was a notable decline in the Purchase Index, or loans tied to the acquisition of properties. We were looking for a like, though opposing rise this week, as the period matched against the Super Bowl inclusive week. Yet, the Purchase Index fell again, this time by 2.9% on a seasonally adjusted basis. Before adjustment, the Purchase Index did improve, but only by 1.4% against the prior week. The gain fell short of making up for the 7.6% decline the week before, so we have to take note. That's because other data has continued to warn of a stall in housing, which we covered in detail in our recent study of the sector.

Indeed, the latest data reported today seems to confirm that concern. The four-week moving average of the MBA's Market Composite Index, which would weed out anomalous factors, is down 0.3%. The moving average for the Purchase Index is off a greater 3.21%. The latest data, also reported Wednesday morning, showed Existing Home Sales running at a drag of an annual pace of 4.57 million in January. The rate was up from December, but only after December's revision dramatically lower, to 4.38 million (from 4.61 million). January's pace was also short of the consensus view of economists, which was set at 4.69 million according to Bloomberg.

Toll Brothers (NYSE: TOL) missed expectations this week, contributing to a second guessing of homebuilder shares finally. We suggested investors sell short homebuilder shares earlier this year, and have been questioning the strength of a housing recovery based on macroeconomic developments that should stall global economic growth.

The SPDR Series Trust Homebuilders ETF (NYSE: XHB) is off about a percentage point at the hour of scribbling here, and looks to be ready to follow the path I've laid out for it now. Individual homebuilders are giving back greater ground, especially those which are in the most precarious of positions. The shares of Hovnanian (NYSE: HOV) and Comstock (NASDAQ: CHCI), two companies I suggested would lead my list lower, are off 0.7% and 3.6%, respectively. K.B. Home (NYSE: KBH), PulteGroup (NYSE: PHM) and D.R. Horton (NYSE: DHI) are off between 1% and 4%. It seems that investors are now agreeing with my argument against the industry, and so support should disappear swiftly for these stocks near term. I would continue to sell the industry's shares as their nascent recovery is undermined by fundamental macro-driven drivers.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.