Beware Housing Stocks' Dead Cat Bounce

After plunging in 2018, stocks of homebuilders, home improvement retailers and other housing-related companies have rebounded so far in 2019, leading some investors to believe that the worst is over. However, deteriorating fundamentals in the housing market suggest that this may be a dead cat bounce, or a temporary rally in the midst of a longer downtrend. Declines are persisting in buyer traffic, existing homes sold, the number of first-time buyers, and sales prices, Barron's reports.

The SPDR S&P Homebuilders ETF (XHB) illustrates the bounce, having advanced by 9.9% YTD in 2019, through Jan. 29, after dropping by 25.7% in 2018. The table below looks more closely at several leading homebuilding stocks, all of which are still down significantly from their highs, despite rebounding in 2019.

Housing Stocks Dead Cat Bounce?

(% Gain YTD 2019, % Fall From 52-Week High)

• Lennar Corp. (LEN): +17.5% YTD, -29.9% vs high
• Toll Brothers Inc. (TOL): +7.1% YTD, -28.6% vs high
• KB Home (KBH): +6.8% YTD, -38.5% vs high
• D.R. Horton Inc. (DHI): +5.8% YTD, -28.4% vs high
• PulteGroup Inc. (PHM): +4.8% YTD, -19.3% vs high
• Source: Yahoo Finance; as of the close on Jan. 29, 2019.

Significance For Investors

On a trailing 12-month basis, home buyer traffic was down by 12% in Nov. 2018 and by 14% in Dec. 2018, per data from Credit Suisse reported by Barron's. Also known as foot traffic, this figure counts the number of instances in which realtors show homes to prospective buyers. "Foot traffic has a strong correlation with future contracts and home sales, so it can be viewed as a peek ahead at sales trends two to three months into the future," per the National Association of Realtors (NAR).

Sales of existing homes fell by 7% in November and by 10% in December, on a year-over-year (YOY) basis. This is the steepest YOY decline since May 2011, as David Rosenberg, chief economist and strategist at Toronto-based wealth management firm Gluskin Sheff + Associates, told Barron's. Looking at the last six months, he sees a 14% annualized rate of decline.

4 Reasons Housing Stocks Could Reverse

• Eroding sales prices
• Decline in first-time buyers
• Falling buyer traffic
• Plunging home sales

Source: Barron's

The median home sales price dropped by 1.4% YOY in December, the fifth decline in six months, Rosenberg notes. He adds that the YOY price growth trend has fallen from 4.1% to 2.9%, one of the quickest decelerations in almost seven years.

The S&P CoreLogic Case-Shiller National Home Price Index, co-developed by Nobel Laureate in Economics Robert Shiller, paints a more optimistic picture, showing home prices in 20 cities up by 5.03% YOY in October, per Yahoo Finance, which adds that this index has been decelerating. Observing that U.S. home prices have been enjoying their third-largest boom since 1890, Shiller told Yahoo, "people are starting to think that housing is expensive, and that could lead to a turnaround and a drop in home prices."

Meanwhile, Rosenberg indicates that first-time home buyers were only 32% of the market in November, whereas he says that 40% is the minimum in a robust market. "The big issue on the demand side is housing affordability," as Robert Dietz, chief economist at the National Association of Home Builders (NAHB), told The Wall Street Journal.

Looking Ahead

A key for the housing market and homebuilding stocks is the path of the economy going forward. A slowdown in growth, employment, and wages will further crimp demand. On the other hand, as noted by Barron's, regional markets within the U.S. can differ widely in terms of home supply, demand, and affordability. As a result, companies that concentrate their business in the most attractive markets may buck the national trends.