Builder Sentiment Insignificant For Homebuilder Stocks

by: Markos Kaminis

Homebuilders were rejected by the market Monday thanks to the latest report from the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (NYSE:HMI). While the data is a true measure of homebuilder sentiment, I view the metric as relatively insignificant for investors in the publicly traded homebuilders.

The SPDR S&P Homebuilders ETF (XHB) dipped into the red in the early going Monday, before reemerging by the close. Housing stocks were mostly lower, excluding Toll Brothers (TOL), which had the benefit of an analyst's positive note. For the rest of the group, trading was tied to the deteriorated data within the HMI report. PulteGroup (PHM), D.R. Horton (DHI), K.B. Home (KBH), Hovnanian (HOV), Comstock Homebuilding (CHCI), Beazer Homes (BZH), and Lennar (LEN) all fell approximately 1% to 2% on the day.

The Housing Market Index dropped three points to a mark of 25, slipping for the first time in seven months. Yet, even at its latest height, it still signified a depressed state of affairs for homebuilders generally. The metric would have to exceed a mark of 50 before reflecting a generally positive viewpoint.

The data alone was not as powerful as the statements by Barry Rutenburg, chairman of the NAHB. He noted the following:

Although builders in many markets are noting increased interest among potential buyers, consumers are still very hesitant to go forward with a purchase, and our members are realigning their expectations somewhat until they see more actual signed sales contracts.

Each of the HMI's component indexes posted declines. The component gauging current sales conditions (26) and the one measuring expectations for the next six months (32) both fell three points, while the measure of traffic of prospective buyers dropped four points to a pathetic reading of 18. The readings were varied regionally, with a gain seen in the Northeast, no change in the West and a three-point decline in the South. The Midwest message was mysterious, marking an eight-point dive.

Nonetheless, I view the HMI data as relatively insignificant for the majority of the publicly traded housing stocks. That's because it measures the view of every homebuilder member of the NAHB, including many decimated small businessmen. The publicly traded builders, with superior operational skill and access to capital, fared better through the deep housing downturn. They are, in fact, benefiting now through the gaining of market share.

As a result, we see a stifled real estate market combined with some positive performance by publicly traded builders. This is a big reason why I favored the housing industry at the start of 2011. It has already priced in significant expectations for a spring selling season recovery this year. I was early in warning that things would change, and missed some of those profits. Yet, I reiterate again that my view of the economy and the important economic risks tied to Iran have me no longer recommending this economically sensitive sector. So, despite my conflicting argument with the economic data discussed above, I agree with the tone of the message.

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