In A Weak Housing Market These Homebuilder Stocks Are Strong

The National Association of Home Builders (NAHB) Housing Market Index (HMI) plunged by a record 42 points to 30 in April, down from 72 in March. This reading rose to 37 in May, still well below the neutral reading of 50.

Single-family housing starts declined by 17.5% in March to a seasonally adjusted rate of 856,000. The deterioration continued in April with a decline of 25.4% to an annual pace of 650,000.

These statistics reflect that the U.S. economy is in a depression!

Home prices continue to be in a reinflating bubble. The latest reading from the S&P CoreLogic Case-Shiller 20-City Composite is for February, before the coronavirus lockdown.

The Graph of the NAHB HMI versus Single-Family Starts

The scale on the left is the Housing Market Index, which is the blue line across the graph. The scale on the right is Single-Family Starts in red on the chart. Look at the right side of the graph and you will see the 42-point drop in April and the modest rebound in May. The graph does not reflect the decline in starts as the April reading will show next month.

One of the observations I have warned about is the fact that HMI was too high versus single-family starts. This will continue to be neutralized over the next few months. Mortgage rates are at record lows, but potential buyers are living in lockdown. New homes can only be viewed virtually.

For example, JPMorgan Chase
JPM
will offer mortgages only to buyers with a credit score of at least 700. It will also require a 20% down payment with a 30-year fixed rate loan.  

The current reading for single-family starts at 650,000 is well below the mid-2006 high of 1.8 million units. This occurred when HMI was above 70.

The S&P CoreLogic Case-Shiller Indices

The chart shows that home prices peaked in July 2006, declined by 35.1% to a cycle low in March 2012. Since then the home-price bubble reinflated by 63.9%. This reading is 6.4% above the July 2006 high. This questions home affordability!

Here is a Scorecard for the Five Major Homebuilders

Homebuilder stocks can be bought for a trade when their P/E ratios are under 8.00. Today only one of the five are cheap by this measure.

Toll Brothers
TOL
reports earnings after the close on Wednesday and its P/E ratio is 7.68. It’s the only homebuilder to miss earnings estimates when it reported on February 25.

All five homebuilders have positive weekly charts and have significant gains since they bottomed between March 18 and March 23.

DR Horton (DHI): ($54.06) Holding its semiannual risky level at $49.91 targets its annual risky level at $58.05.

KB Home
KBH
($30.53): Holding its quarterly value level at $21.47 targets its annual risky level at $37.36.

Lennar
LEN
($60.09): Holding its semiannual pivot at $53.00 targets its annual risky level at $75.17.

PulteGroup
PHM
($33.31): Holding its quarterly pivot at $28.08 targets its semiannual risky level at $39.87.

Toll Brothers ($28.99): Holding its quarterly pivot at $22.27 targets its semiannual risky level at $40.26.