Since the start of the year, shares in US housebuilders have been particularly unstable in what is a...
Since the start of the year, shares in US housebuilders have been particularly unstable in what is a notoriously volatile sector.
After signs of recovery in January, with shares rising 7%, the crucial spring selling season proved to be a disappointment even before the full effect of the sub-prime mortgage tightening took hold. The stocks have reacted accordingly and are down some 25% from February highs, as expectations have been reset by a constant flow of negative news.
These fluctuations vividly illustrate some of the challenges the market faces when interpreting news flow on the state of the US housing market.
Official data should be treated with healthy scepticism. Problems with seasonal adjustment and small sample sizes can render monthly data misleading, and the accurate calculation of sales volumes and inventories is difficult. Broadly speaking, however, the numbers can still tell us something, such as the very local nature of the US housing market.
The inherent bias of most commentators, many of whom have a vested interest in keeping sentiment positive, is also an issue. It not only contributes to the boom but prolongs the bust as sellers are slow to adjust their expectations downwards, and existing home inventories stay on the market for longer.
Many observers and industry executives claim that underlying demand for new homes in the US is around 1.8m to 2m houses a year, a run rate which, since 1987, has only been achieved in the period from 2003 to 2006.
Yet these same individuals will also note that much of the demand of the last three years was driven by speculators, implicitly conceding the 2m homes a year figure is optimistic.
As the spring passes, sellers of existing homes are likely to lower their sale price expectations as time runs out for those who need to move before the back to school deadline in the autumn.
Coupled with a further reduction in demand as lending criteria tighten, there will be continued house price pressure in most markets, further margin contraction at the public builders and an ongoing reluctance by would be buyers to close on purchases until they believe that prices have stopped falling.
Arguably, much of this is already priced into the stocks of the public builders, but that, of course, is little comfort to those on the wrong side of the downturn.