Homebuilders: Headed for a Fall?

Home builders are bouncing back today after Friday’s rout. Opinions are divided over the bounce is just a prelude to another fall.

Sam Hodgson

Toll Brothers (TOL) has gained 1.6% to $31.70, KB Home (KBH) has risen 1.4% to $16.67 and Lennar (LEN) has advanced 1.1% to $32.95. The Ryland Group (RYL) has jumped 1.9% to $35.52 and PulteGroup (PHM) is up 0.8% at $16.19.

Today’s bounce appears to confirm Barclays strategist Barry Knapp’s observation on Friday about the sector–that it’s not a good time to be short. He writes:

Based on an our outlook for rates, short positions in cyclically leveraged rate sensitivities, which have already reacted to concerns the Fed is removing the punch bowl too soon—for example homebuilders—based purely on expectations of higher rates offers a weak risk/reward scenario. The disorderly move higher in rates should be behind us and although rates are biased higher, this should be in concert with improved economic conditions and rising risk assets. While valuations for builders still have wood to chop, conditions could align that make these stocks outperformers in 2014.

Susquehanna’s head of derivative strategy Trevor Mottl, however, recommends betting against the sector with options on the iShares U.S. Home Construction ETF (ITB) following Friday’s big drop in new home sales. He writes:

Hot Performing Companies To Invest In Right Now

Since the summer of 2010, shares of ITB…have broadly followed changes in new, single family home sales. Following Friday's lackluster new home sales for July (394k versus estimates of 387k and a revision down for June to 455k from 497k, SAAR), we look at ways to establish downside exposure to home builders.

July's data marks the largest one month decline in new home sales since the -41% move in May of 2010. While new home sales data tends to be moderately volatile with an average 12m rolling volatility of 27.6% over the past three years, July's 14% decline is a significant move.

The iShares U.S. Home Construction ETF has gained 1.5% to $21.38 today.