What the Collapse in Homebuilder Stocks Forewarns

The housing market that lured institutional investors in during 2012 and 2013 is showing signs of cracking. 

Before I go into more detail, you have to keep in mind that affordability is the key to the housing market and affordability for housing only increases once home buyers’ wages increase. Right now, incomes in the U.S. economy are declining. And you can add to the problem the fact that mortgage rates have been rising, too, putting further pressure on affordability for home buyers.

 Last week, the chief economist of the California Association of Realtors said, “Housing affordability is really taking a bite out of the market… We haven’t seen this issue since 2007.” (Source: “Southland home prices surge but sales plummet,” Los Angeles Times, April 15, 2014.) 

Zillow, Inc. (NYSE/Z), a real estate information company, expects home values in more than 1,000 U.S. cities to be more expensive than ever within the year. The chief economist at the firm said, “The lows of the housing recession are becoming an increasingly distant memory as home values reach new highs and homes become more expensive than ever in many areas… As affordability worsens, more residents will be forced to search for affordable housing farther from urban job centers, and home values in some areas may have to come down.” (Source: “Home Values in More Than 1,000 U.S. Cities Expected to Be More Expensive than Ever Within the Next Year,” Zillow, Inc. web site, April 22, 2014.) 

Don’t get me wrong. The U.S. housing market has definitely improved since the Credit Crisis of 2008. But, as I have been writing, it is not a normal housing market recovery, because we don’t have first-time homebuyers moving into the housing market. Nor do we have the people buying the houses moving into them. 

It is institutional investors who have fueled the recovery in single-family home prices by pouring in billions of dollars into the housing market (if not trillions of dollars) to buy rundown homes in foreclosure, fix them up, and rent them. 

Recent data show the momentum in the housing market recovery is slowing. Sales of previously owned homes fell 7.5% in March from a year earlier. Purchases of new homes fell 14.5% in March from February. (Source: “Housing in U.S. Cools as Rate Rise Hits Sales,” Bloomberg, April 25, 2014.) 

We can clearly see the impact on softer demand for new homes in the chart below of the Dow Jones Home Construction Index (an index that tracks the performance of the largest U.S. homebuilding companies). 

                                                 Chart courtesy of www.StockCharts.com 

As a whole, homebuilders’ stock prices are down roughly 12% since their peak in late February and early March. As stocks are a leading indicator, not a lagging indicator, you can see why I’m so worried about the U.S. housing market in 2014. 

This article What the Collapse in Homebuilder Stocks Forewarns was originally was posted at Profit Confidential