A Double Whammy for Homebuilders

Last week I wrote about two homebuilding stocks that I felt were showing
stronger relative strength than their peers and have been outperforming the S&P
500 as of late. Those two stocks are Ryland Homes (NYSE: RYL ) and Beazer Homes
(NYSE: BZH ). However, it seems as if every time the slightest bit of sunshine
comes along for the real estate market, a dark cloud quickly covers it. As my
previous story explained, the group was clearly overextended and ready for a
pullback to make them more attractive. And sure enough, this week landed a
one-two punch of reports that pummeled this sector in its entirety and
triggered the start of the pullback I was expecting. On Monday, KeyBanc Analyst
Kenneth Zener downgraded both Toll Brothers (NYSE: TOL ) and Lennar (NYSE: LEN
), from buy to hold, expressing pessimism about the homebuilder sector for 2012.
Weaker employment numbers and an end to government stimulus plans were two
factors cited for the downgrade. Zener also noted the recent run-up in these
stocks prices as cause for concern. Following the downgrade, most of the
homebuilder stocks were down 2% to 3% on the day. But that wasnt the only blow.
On Tuesday, the National Association of Realtors (NAR) announced that it has
been incorrectly reporting home sales numbers since 2007 (which just happens to
be the year the real estate bubble burst), and all of those numbers will need to
be revised lower. NAR will issue a full report on the revisions next week. Given
that NAR is the countrys largest real estate organization in the country and
responsible for the industry's most important data keeping how could this
happen, and what are the repercussions for investors? According to NAR
spokesperson Walter Maloney, Were capturing some new home data that should have
been filtered out, and we also discovered that some properties were being listed
in more than one list. In other words, NAR was counting some sold properties
more than once, and even new-home sales were sometimes added to the mix. But NAR
is supposed to report only existing-home sales in its data. Although new-home
sales and existing sales are two different entities, a strong existing-sales
report usually indicates better numbers for the homebuilders as well. Therefore,
any downward revisions to existing sales are sure to hurt the value of the
homebuilder stocks as analysts revise their expectations. Another group that
could see their prices falter from the revised sales numbers is the home
improvement stocks, such as Home Depot (NYSE: HD ) and Lowes (NYSE: LOW ). If
analysts 2012 projections for these companies were based on more upbeat home
sales data, they may want to take another look at the home improvement
companies, as well as building materials stocks such as Beacon Roofing Supply
(NASDAQ: BECN ) and USG (NYSE: USG ). Both Ryland and Beazer Homes have now
pulled back considerably from their recent highs on the heels of these two
reports, and are more attractive at these levels than they were last week. Click
to Enlarge Courtesy of stockcharts.com However, with the full NAR report coming
out next week, it would be prudent to wait at least until then before purchasing
any homebuilding stocks. Furthermore, with declining stochastic and RSI
indicators, and now a MACD sell signal (see RYL chart), it looks like more
selling could be the next step for this beleaguered sector.