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Why Homebuilder Stocks Haven’t Plunged

June 23rd, 2010 Michael McDonough

The amount of new homes for sale in the U.S. reached a multi-decade low in May helping boost U.S. homebuilders.  To find a point in time where fewer new homes were on the market you would have to go all the way back to the early 70’s/late 60’s (see chart).  While the sales pace of new home doesn’t bode well for the very short-term outlook for home builders the miniscule amount of new homes on the market means that as buyers return—once labor markets improve—home builder demand will likely spike.  The low level of inventories also implies short-term homebuilder risk could be somewhat limited, giving them more room to wait out the ongoing soft patch.  While I am in no way a housing bull; the outlook for homebuilders could be worse, and the group will likely continue to trade range bound until a clearly employment picture develops.  To monitor this I will be watching weekly jobless claims and housing starts over the months ahead. 


Source: Bloomberg

The next shoe to fall will be May’s pending home sales, released on July 1st, which measures contract signings for existing home sales during the month.  I expect the decline in pending home sales will likely be at a smaller magnitude than we saw in today’s new home sales release partially due to no shortage in existing homes and much large monthly sales volumes.  Since the onset of the housing crisis buyers have generally preferred existing homes as they provide better value per dollar compared to their new home counterpart; one could compare it to buying a used car vs. new.   

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