(This is an excerpt from an article I originally published on Seeking Alpha on February 19, 2014. Click here to read the entire piece.)
The latest Housing Market Index (HMI) from the National Association of Home Builders (NAHB) and Wells Fargo demonstrates a very large and sudden drop in the confidence of home builders in January/February. The poor showing stands in stark contrast to the relatively bullish earnings reports from the likes of D.R. Horton (DHI) and Meritage Homes (MHI). The NAHB provided reasonable explanations for the 10-point drop to 46 but not for the size of the drop. Moreover, there could be a dichotomy in sentiment between the large, publicly traded builders and the rest of the industry if the latest earnings reports are still valid in their assessments.
The NAHB blamed “unusually severe weather conditions across much of the nation along with continued concerns over the cost and availability of labor and lots.” The crush of the winter weather makes sense for explaining the drop in current confidence but not in the large drop in confidence in the West which includes large regions not impacted by severe snowstorms. Severe winter weather also does not explain why the index for future expectations also dropped so much. The concerns over cost, labor and lots can explain the rest of the drop, but it directly contradicts the persistent and consistent claims of home builders that 1) they have costs more or less under control and have the pricing power to keep pace, and 2) they learned their lessons from 2013’s selling season and came into 2014 with inventory ready to sell…{snip}
The chart below shows the history for the three components to the HMI (for more background on how to interpret the relationships amongst these components, see “The Housing Market Index: Strong Trends, Correlated Components, and A Weak Northeast“).
Click image for larger view…
Source for data: National Association of Home Builders
Note the large drop in the HMI breaks the strong uptrend that distinguished the current recovery. {snip}
{snip}
Source: FreeStockCharts.com
Be careful out there!
(This is an excerpt from an article I originally published on Seeking Alpha on February 19, 2014. Click here to read the entire piece.)
Full disclosure: long DHI