Homebuilders Schmeissed

Schmeiß die Mama aus dem Zug!

Rick Ackerman looks at shorting U.S. home builders, his notes and a chart are below. I added more real estate sector stocks, ETFs and related index thumbnails. In the bottom left of the chart, I have put a blue dashed oval around XRE.TO which consists of securities of Canadian real estate investment trusts (REITs) listed on the Toronto Stock Exchange. 

Apparently Canadians like their real estate dividends; the XRE.TO is still well above its 50 day moving average. 

But as Jin Won Choi noted on March 23, 2015:

In 2012, the average Canadian had a net worth of roughly $243,800. Of that, roughly $155,000 was attributed to real estate, which in most cases represents a person owning his or her own home. The average Canadian is therefore already heavily invested in real estate, so it doesn’t make sense to increase the real estate component of the investment portfolio further by adding REITs.

The other reason is that a REIT’s long term returns are tied to the price of properties. If they overpay for a property, they will collect less rent in proportion to the purchase price, and they will also have a hard time selling the property at a profit in the future. Both of these factors will serve to decrease the future dividend yield of a REIT that overpays for properties.

Currently, many reputable publications such as the Economist and the OECD consistently rank the Canadian housing market as one of the most overvalued in the world. 

The Organisation for Economic Cooperation and Development (OECD) has said Canada’s market is overvalued by as much as 30 per cent when measured by the price-to-income ratio and by 60 per cent based on the price-to-rent ratio.

If they are correct, it doesn’t bode well for the long term returns of Canadian REITs. 

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Rick's Pick for Friday April 24, 2015 - $ DHI (D.R. Horton)
Could this be the first crack in the dam? Homebuilder D.R. Horton’s shares have gotten schmeissed in the last two days (along with Lennar and Pulte Group), as the accompanying chart attests. Recall that the implosion of homebuilder stocks that began in the summer of 2005 led the stock market’s collapse by more than two years. We ought to pay close attention in any case, since shorting the shares of Beazer, Horton, Lennar and other homebuilders back in 2005 was the best and easiest way to have profited from the Great Financial Crash. If this selloff is similar to the earlier one, it will give way to a secondary top achieved via a steep rally. For now, however, look for a short-term bottom at exactly 25.11. If this Hidden Pivot is easily exceeded, or if the stock closes below it for two consecutive days, it will be time to unfurl the yellow flag.

CLICK CHART TO ENLARGE

Throw Momma from the Train (1987)