Another Crack In The Foundation Of Housing

| About: SPDR Homebuilders (XHB)
This article is now exclusive for PRO subscribers.

The week's data flow produced another crack in the foundation of the Real Estate sector and pounded housing stocks as well. After raising the volume on my bear call for housing over recent weeks, I suppose all I can say today is I told you so.

Construction Spending was reported Monday for the month of February, and the shares of homebuilders suffered a shock as a result. Total Construction Spending declined 1.1% in February, stunning economists who had forecast an increase of 0.7% at the consensus. When economic data misses significantly against the economists' view, we see impact to stocks, whose valuation estimates are often influenced by the macro view at Wall Street firms, and are driven by relative sector strategy and industry favoritism as a result.

The shares of homebuilders took a sledge hammer to their bearing walls on the news, with the SPDR S&P Homebuilders (NYSE: XHB) off 0.75% on a day when the SPDR S&P 500 (NYSE: SPY) rose 0.73%. The XHB's beta based on three years of data is listed as 0.99 by Yahoo Finance; that's pretty much a 1.0, and yet the security moved in the polar opposite direction of the broader market Monday. Obviously, that was due to the industry specific information, which was outweighed in the broader market by the much more currently relevant global manufacturing data that reached the wire Monday. I say "more currently relevant" because of the severe shrinkage of the housing market over recent years and the numbed expectations for it within the stock market.

Homebuilder shares were broadly lower, with industry players Toll Brothers (NYSE: TOL), D.R. Horton (NYSE: DHI), K.B. Home (NYSE: KBH), PulteGroup (NYSE: PHM), MDC Holdings (NYSE: MDC) and Lennar (NYSE: LEN) all lower on the day. Several are lower again today, like Hovnanian (NYSE: HOV) and Beazer (NYSE: BZH).

More than the general drop in construction spending, which was affected by a 1.6% decrease in non-residential construction, the housing industry took a blow due to a 1.5% decline in new single family home construction. Multi-family projects fared well again, but a renter nation is not indicative of a healthy economy. Multi-family construction rose a full two percentage points in February, continuing its drive of overall residential construction activity.

In conclusion, I offer again one important caveat that is key for the larger publicly traded homebuilders in strong enough capital position to capitalize. The overall weakness of the housing industry has offered many of these firms a great opportunity to take market share. I expect that this is the key reason some have reported solid business results through a generally soft industry environment. I also believe this should support the shares of relative companies, especially once recovery is detected in earnest.

That said, I also believe the market does not perfectly understand this industry-critical fact, and so housing stocks will be punished without discretion as the economic deterioration I expect unfolds. In the end, I believe all of such discounting will prove warranted, as the economic scenario I see as most likely is dire, and not one not generally forecast by economists. I have offered tidbits of information regarding this view in articles, but it is not specifically relative to this report. So, I will have more to say about it in the future within a detailed forecast for the economy.

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