Housing bubble not ready to burst yet
Not only has everyone predicted the bubble for three years now, but everyone also has predicted the pin: rising interest rates. When mortgage rates did indeed rise in anticipation of the Federal Reserve's rate increase, the high-flying homebuilders' stocks deflated on cue. Since early March, Toll Brothers is off 11 per cent, Centex is off 21 per cent and Lennar Homes has shed 20 per cent, though Pulte Homes has managed to rise slightly.
The US housing market may be a bubble or be well on its way to becoming one, especially on the coasts. But the problem with that prediction, and making bets against the homebuilders' stocks, is one never knows when the bubble pops or just deflates.
The Economic Cycle Research Institute's leading home price index a reliable indicator that predicted downturns in the 1970s and 1980s is holding up well.
Meanwhile, the average rate on a 30-year mortgage has actually fallen by more than half a per cent to 5.46 per cent, according to Bankrate.com. The cooling of the US economy coupled with lower rates may mean the housing market's incline might have self-sustaining momentum.
A few data points may give housing bulls a lift. New home sales today are expected to slip to 1.3m from 1.33m after yesterday's 2.9 per cent decline in existing home sales from June's record pace. A modest decline may ease concerns about an overheating housing market.
Meanwhile, Toll Brothers posts earnings today, with Wall Street anticipating a 32 per cent rise.
In addition to strong earnings, supplies remain relatively tight in part because homebuilders underestimated the surge in purchases by immigrants over the past few years. On a valuation basis, the stocks remain relatively cheap.
The big players, meanwhile, have the ultimate barrier to entry: huge tracts of land. While prices are softening in the hottest markets, they are offset by rising prices elsewhere. The good times will not last forever, but neither do they seem set for a sudden halt.
Long-suffering short sellers of homebuilding stocks finally got a break with the recent decline in the sector; a prudent move might be to step aside as the housing market takes in more air.