Papa Housing Bear Goes Into Hibernation

By Dr. Duru written for One-Twenty

December 1, 2006


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I could hardly believe it when I saw it. First, housing stocks jumped BIG on the last day of November while no homebuilder reported earnings results and no new housing data was released. Instead, the big news of the day was that one of the biggest housing bears, or at least one of the most well-known of the housing bears, essentially capitulated. Bank of America housing analyst Daniel Oppenheim actually upgraded several homebuilder stocks from sell to neutral: Meritage (MTH), NVR, Inc (NVR), Pulte Homes (PHM), Ryland Group (RYL), and Toll Brothers (TOL). Oppenheim even warmed up enough to grant buying status to Standard Pacific (SPF). Other homebuilders got target hikes although ratings stay at neutral: M.D.C. Holdings (MHO), WCI Communities (WCI), Lennar (LEN), Hovnanian (HOV), DR Horton (DHI), Centex (CTX), Comstock (CHCI) and KB Home (KBH).

This news was so big it seemed that every major news outlet jumped on the story. And the bears had no choice but to run for cover. And cover they did! (See earlier missive for an older summary listing the massive levels of short interest in the homebuilder stocks). On Thursday, huge moves ranging from 4 to 9% in most homebuilder stocks have all but confirmed that we have seen the bottom for these stocks as many conquered important levels of resistance. The homebuilder execs have not yet called the bottom, and many housing bears are still out there growling, but the market is screaming out that it wants to get ahead, far ahead, of the game. Most homebuilder stocks are still stuck in long-term downtrends, but a strong up-trend has developed since the summer's bottom and now 200-day moving averages (DMA) are getting broken to the upside. I am certainly one to take a hint! The homebuilders are now back in the "buy the dips" radar.

I wish I could get my hands on Oppenheim's full report. Instead, I have culled together all the quotes I could find from various articles:

  1. "We do not expect a smooth upward move, but expect choppiness over the next 12-24 months based on excess inventory, as it will take time to work through the oversupply. [Our] monthly survey of real-estate agents showed that buyer traffic in 33 out of 39 markets had improved from October. Traffic is a leading indicator of sales and pricing.
  2. The inventory level is a "wild card" in the housing market, as many builders continue trying to sell off the overhang of homes on the market. A seasonal increase in inventories in the Spring could lead to further pressure on prices and additional cancellations.
  3. We do not think the group is out of the woods yet because there remains a significant inventory problem, and pricing (margins) will probably continue suffer.
  4. The recent declines in new construction and increasing affordability of homes is helping the sector. In October, new-home permits fell 32% from a year earlier.

As you can see, Oppenheim is not exactly pounding the table. In fact, he is almost dishing out backhanded compliments. But I am sure he would agree that future sell-offs in this sector need to be bought.

Some charts will show the power of Thursday's move. There is of course no guarantee of a bottom, but the charts just seem to say that the odds are in favor of a bottom. Of the homebuilder stocks I follow, LEN, MDC, and TOL are the three that already conquered the 200DMA resistance in the past two weeks or so. The stocks that have now conquered the 200DMA resistance are: PHM, RYL, HOV, KBH, DHI, CTX, MHO (just barely!), and BHS. A few got turned back, but I am sure only temporarily: MTH and NVR. Still behind the curve? Lonely, BZH. Let's specifically take a look at PHm in multiple timeframes to understand why things may actually be looking up now.

Pulte Homes short-term stock chart


Pulte Homes intermediate-term stock chart


Pulte Homes long-term stock chart


Be careful out there!
DrDuru, 2006