More data points on the weakening homebuilding sector

Posted by: Aaron Pressman on August 31, 2006

A few interesting data points on the future of homebuilding stocks: a piece in USA Today today notes that homebuilders are shedding land and land options they own. Not only is this contrary to one of the professed strategic advantages that the builders were claiming only a year ago, it’s also evidence from those on the front lines just which way the housing market is going.

Also, via Eli Hoffmann at Seekingalpha.com, I came across the first analysis I’ve seen of soundings from the CME’s new city-by-city housing futures market. The analysis is by Marc Gerstein of Reuters’ investment research arm. Looking at current futures versus May 2007 contracts, he says investors are expecting declines of about 6% to 10% in all 10 cities with a composite 8.3% drop. Still, the CME market is too young to provide a solid read. Some markets do show great predictive power (if only for the opening grosses of Hollywood flicks) while others, like the forward interest rate curve, are more likely to be wrong.

Stock investors still appear pretty bearish. I took a quick look at the Dow Jones U.S. home construction index and you can see that it has basically made a two-year round trip. At the end of August, 2004 the index stood at about 600, it rose to 1037 by January 2006 and now it’s back at 612 (up from a recent dip into the 550’s). Four years ago, the index was back at 300. A return trip to lower levels looks more likely than a further increase, given today’s data points.

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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