Housing Market Tracker - Analysts, Technicals Indicate Homebuilder Rally is Over

by: Judy Weil

Quotes of the Day

“The fundamental outlook went from horrendous to 'maybe there's some hope at some point down the road. You couple that with a large amount of short interest and you've got a situation that could provide explosive rallies." - Eric Landry, a Morningstar associate director, on homebuilder stocks. (Dow Jones via CNN Money, Mar. 25th)

"We don't think the fundamentals have troughed. We believe the stocks will ultimately retrace a lot of their recent gains." - Michael Rehaut, a JPMorgan home building analyst. (Dow Jones via CNN Money, Mar. 25th)

Homebuilder Technicals and Forecasts

Case-Shiller Home Price Index Down 10.7% Y/Y for January. “The Case-Shiller 20-City Composite index of home prices fell 10.7% for the year ended in January. For the month of January prices fell 2.4%. Nineteen of the 20 cities reported 12-month price declines, but Charlotte, NC bucked the trend on a 1.8% gain. In pre-market trading the homebuilder ETF (NYSEARCA:XHB) is up 0.2% in thin trading. Real estate consultant Ken Rosen told MarketWatch… sees another leg down for homebuilders fueled by the next wave of foreclosures and higher job losses. He called the current rally a "dead cat bounce." (Trading Markets, Mar. 25th)

Homebuilders ETF backs away from 200-day SMA, again. “The iShares DJ U.S. Home Construction ETF (BATS:ITB) was on track to post its first loss in five sessions, as the homebuilder sector tracking stock backed off the 200-day simple moving average for the second-consecutive session… The ITB had been up as much as 1.9% at its intraday high of $21.44, which was just shy of the 200-day SMA of $21.46. Earlier, JMP Securities upgraded several homebuilders, citing peaking inventory levels, while Merrill Lynch recommended selling the sector on the rally.” (Thomson Financial via CNN Money, Mar. 25th)

Sell Homebuilders On Fed Rally, Premium Valuation; Land Sales Show Why – Merrill. “Merrill Lynch Tuesday reiterated it sell ratings on homebuilders DR Horton Inc. (NYSE:DHI), Centex Corp. (CTX-OLD) and Pulte Homes (NYSE:PHM), saying its depletion framework suggests a 30%+ downside risk from current levels after the builders rallied 33% from March 10 on Fed actions and better-than-expected home data. Merrill: "We think 1 times book (value) overstates the net present value of many builders' inventory as land sells for 15 cents to 40 cents on the dollar. Land sales raise cash which is good, but highlight elevated valuations after the recent rally." (Trading Markets, Mar. 25th)

Options Traders Boost Bearish Bets on Shares of Homebuilders. “Options traders increased bearish bets on KB Home (NYSE:KBH) and Lennar Corp. (NYSE:LEN) before the U.S. homebuilders report quarterly results later this week. Put volume for KB Home, the fifth-largest homebuilder by revenue, rose to 11,241, or almost twice the 20-day average. The number of puts traded exceeded calls by almost 5-to-1… The most-active Lennar options were April $17.50 puts, which accounted for 80% of today's put volume. The price of those contracts rose 9.1% to $1.20.” (Bloomberg, Mar. 25th)

Home Builders' Stocks Continue Climbing Wall Of Worry. “UBS: The Dow Jones US Home Construction Index has climbed more than 20% this year… Since January, M/I Homes Inc. (NYSE:MHO) has soared nearly 75%. Hovnanian Enterprises Inc. (NYSE:HOV) is up more than 70%. Both Standard Pacific Corp. (SPF), currently negotiating with lenders to amend bank credit facilities, and Pulte Homes Inc. (PHM) have risen more than 40% this year… But most industry watchers, convinced the housing market hasn't reached bottom, say the rally is unlikely to be sustained… JPM short report: Both Beazer Homes USA Inc. (NYSE:BZH) and Standard Pacific had short interest of nearly 70% of their outstanding shares.” (Dow Jones via CNN Money, Mar. 25th)

Analyst Note: Hovnanian. “A Lehman Brothers analyst says Hovnanian Enterprises Inc. may have trouble competing in the next few years because of the homebuilder's limited access to capital. Analyst Megan McGrath reiterated her "underweight" rating on the stock. She says the company's recent renegotiation on the terms of a credit facility allays some short-term worries about the company, but that long-term access to capital remains uncertain.” (AP via Chron.com, Mar. 25th)

Profiting from Hovnanian - Even in Case of Bankruptcy. “Hovnanian has a preferred that trades on Nasdaq (NASDAQ:HOVNP) which has a coupon off of a $25 par of 7.6%, or .477 cents a quarter. In March 2007, it traded at 24.50, almost par. As the housing situation started to unravel, [Hovnanian] halted payments of the preferred dividend, causing a plunge in the preferred shares. You can [now] buy the preferred at a discount to the common. If the preferred ever starts paying dividends again… most likely [they will] trade at a significant premium to the common shares. If you buy the preferred shares and short the common, if Hovnanian never recovers your principal will still be protected… odds are they will eventually seek Chapter 11 protection.” (Jonathan Blumberg in Seeking Alpha, Mar. 24th)

KB Home Up on Home Sales Data. “On Tuesday, KB Home (KBH) stock [was] trading [midday] at $27.75, up $2.49 (9.70%). The stock hit its 52-week high of $49.34 in March and set its 52-week low of $15.76 in January. KBH has been dropping for most of the past year. Shares of housing stocks have been surging [lately.] Technical indicators for the stock are bullish and steady while S&P gives KBH a negative… sell rating. If you’re looking for a hedged play on this stock, consider a July bull-put credit spread below the $15 range. KBH stock could fall up to 45.9% before expiration and this position would still be profitable.” (Market Intelligence Center, Mar. 24th)

Get Seeking Alpha's housing market coverage by email -- it's free and takes only seconds to sign up.