MorningWord 6/22/16: House Speaker

by Dan June 22, 2016 10:02 am • Commentary

Yesterday, Lennar (LEN), the largest homebuilding company by market cap and sales beat Q2 earnings estimates. Deliveries rose 12% year over year with a 4% increase in selling prices.  Given the rate environment and the unemployment rate below 5% it makes sense that new home sales are humming. What doesn’t make a ton of sense is why LEN trades about 1x its eps growth rate, well below a market multiple with a P/E of 12.  Shares of LEN are down 5.5% on the year, and down 17.5% from its 52 week highs made last summer. What’s most troubling was yesterday’s reaction to seemingly good fundamental news, the stock gapped up 3.25%, but spent the rest of the day working lower, closing down on the day, 4% from the opening highs.

The stock is in a clear downtrend from its recent highs, that happen to be 9 year highs, with mid $40s serving as important near term technical support:

LEN 2yr chart from Bloomberg
LEN 2yr chart from Bloomberg

Weeks after April Home sales showing the largest gain of 16.6% in 24 years, bringing single family home purchases back to levels not seen since January 2008, one has to wonder why the stocks that make the homes don’t act better. One reason is that in April (per the WSJ, emphasis mine):

The median price of a new home—the point at which half of homes were sold above and half sold below—rose to $321,100 last month. That was up 9.7% from a year earlier and the highest level on record. 

This at a time when by most accounts, U.S. consumers who can’t afford a home near or above the median price in April are struggling to pay debts, (per Business Insider this morning, citing UBS research):

“The overall mosaic is, in an environment characterized by substantial inequality, higher income earners are inclined to save and invest, rather than spend. Ultimately their funds translate into capital or loans provided to the rest of the private sector: the higher the concentration of income and wealth, the more asymmetry between savers and borrowers — in terms of numbers and creditworthiness. Too much capital may be chasing too few creditworthy borrowers, particularly in an environment of abnormally low interest rates and where non-bank loan growth has been aggressive.”

And it’s not just homebuilding stocks that have taken a pause, home improvement retailers like The Home Depot (HD) had seemingly been immune to almost any economic headline but is down 7% from its recent all time highs in May. It sits just above important technical support now:

HD 1yr chart from Bloomberg
HD 1yr chart from Bloomberg

Despite a string of good news in housing, these stocks have all paused or pulled back. That price action is signaling that the jig may be up for the U.S. housing recovery trade.