The Lark Research Homebuilder Stock Index, a composite of 14 homebuilders, has rallied back over the past couple of weeks. Last week (12/5), the Index surged 12.2%, compared with declines of 2.3% in the S&P 500 and 2.6% in the Russell 2000. From the Nov. 21 lows, the Index is up 61%, much better than gains of 10% in the S&P 500 and 13% in the Russell 2000.
Performance of the Lark Research Homebuilder Stock Index vs. the S&P 500
and Russell 2000
December 26, 2003 = 100
The catalyst for the rebound has been the sharp drop in interest rates. The yield on the 10-year Treasury note has fallen more than 100 basis points over the past three weeks. Rates on 30-year mortgages, meanwhile, have dropped to 5.53% from a recent peak of 6.46% at the end of October. The credit crisis had pushed mortgage rates higher, but the recent easing in credit conditions has helped to bring them down. The Fed's recently-announced decision to purchase $500 billion of GSE-guaranteed mortgage-backed securities has brought the 30-year mortgage rate down even more. There is now talk that the government will push mortgage rates down as low as 4.50% to encourage more home purchases. All of these developments have helped to renew optimism about the prospects for the housing industry and the homebuilders.
As can be seen in the chart above, the Homebuilder Stock Index turned down sharply in early October and broke through key support levels in late October. That support represents the bottom end of the wide trading range of homebuilder stocks over the past year; but support also extends back to 2002 (not visible in the chart). Now that the Index has broken through its key support level of 40, what was support now becomes resistance. (That's because investors who bought these stocks at the support level become sellers when the stocks rebound to recoup their investment.) Indeed, in early trading today (12/8), homebuilders stocks are down, even though the market is up by nearly 3%.
Going forward, it is difficult to predict where homebuilder stocks will go. On the one hand, I do expect that the stock market's recent rebound, which I believe is the beginning of a bear market rally, will continue at least until the end of the year. If so, homebuilder stocks should participate in this on the upside.
On the other hand, I believe that, in the absence of strong action by the Federal government, foreclosures will be much higher than I originally anticipated. Current estimates, cited by Fed Chairman Bernanke in a recent speech, call for about 2.25 million foreclosures in 2008. That level has been held down by a moratorium on foreclosures in many states and also more recently by the GSEs, Fannie Mae and Freddie Mac. The FDIC implicitly estimates as many as four million foreclosures in 2009, if its proposal to avoid 1.5 million foreclosures is not adopted. With the steeper slide in the economy lately due to the credit crisis, there is a good chance that foreclosures will be higher than the FDIC's estimates.
In any event, 2009 foreclosures will almost certainly be much higher than the one million or so that I (and other housing market analysts) had previously projected. Continued high foreclosure inventories in 2009 could very well push back any improvement in the housing market until 2010 or perhaps even to 2011. It appears, then, that unless the Federal government takes much stronger steps to avoid foreclosures and move housing inventories, 2009 will be at least as tough on the homebuilders as 2008.
December 8, 2008
Stephen P. Percoco
Lark Research, Inc.
P.O. Box 1409
Mashpee, MA 02649
(732) 763-0763
webmaster@larkresearch.com
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