Housing Starts: Biggest Plunge In Four Years

by Dave Kranzler, Investment Research Dynamics

Will the price of lumber be the tell-tale that they can’t hide?  Or do you want to believe the “it was the bad weather in New York, man” narrative?   Housing starts ripped lower in February, down 17% from January.  They were 14.4% lower than consensus estimate.   Here’s the data link:  Housing Starts.

Let’s think about that for moment:   housing starts missed Wall Street’s brain trust consensus estimate by 14.4%.   IF the weather was expected to play a factor in housing starts, wouldn’t Wall Street have revised its estimates for February lower to reflect that?  After all, every analyst has had nearly 3 weeks since the end of February to revise down their estimates knowing there was some snow in New York during February…

Single family starts dropped 17% and apartment builder starts dropped 21.6%.  I have been suggesting for several months that a glut in apartment building construction has developed.  Not only in Denver, which I can observe and experience (I was offered a discount to re-sign my lease in a luxury building that is less than 1-yr old, many newer buildings are offering 1-month free and there’s several big buildings still being built), but I have received reader emails from all over the country which describe apartment building gluts in their area.

Of course Wall Street will promote the “permits” report, which showed a slight increase.  But, believe it or not, a homebuilder can’t sell a permit.  Homebuilders have already amassed a level of inventory that is as high as it was in 2005/2006 at the peak of the bubble.  Some builders, like the ones featured in my research reports, now have inventory levels that exceed their inventory at  the bubble peak.   Note:  unit sales are 60-70% lower than at the peak.

The homebuilder sentiment index released yesterday shows falling builder “optimism.”  The most troubling metric was “prospective traffic,”  for which the index level plunged to 37.   Anything below 50 is not good.  Anything below 40 is a disaster.   By the way, those metrics are based on a March survey, when the weather has been exceptionally nice throughout most of the country…

The homebuilder stocks are going to experience an epic crash when reality grips the sector.  The tech bubble that’s formed might last until the SPX finally rolls.  But every homebuilder is carrying massive levels of debt and low levels of cash.  They have to sell homes to service their debt.  The debt levels alone will torpedo these stocks.  I have five great ideas in my  Homebuilder Research Reports  section.

Each report details the highly misleading accounting being used by these builders.  Each one also demonstrates why these builders are more leveraged now than they were at the bubble peak.  And each report shows examples of using puts and calls to replicate shorting the stocks, how to enhance returns and how to reduce the risk of another insanity bounce in stocks overall.   Two of the names have already returned over 20% for the investors who took advantage of them.

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