Talking Numbers

Why home builders could be in trouble

Why home builders could be in trouble
Why home builders could be in trouble

Mixed data on housing this week has the markets scratching its collective head. Is the housing recovery continuing or did it just stumble?

On Wednesday, the US Commerce Department released data showing new home sales rose 9.6% compared to December. January saw a seasonally adjusted annual rate of 468,000 new homes sold, a 2.2% increase over last year. That soundly beat economists' forecasts of a drop to 401,000 new homes.

(Read: US sales of new homes leap 9.6 percent in January)

So, everything should be okay in housing, right? Well, not exactly.

Housing starts – that is, the future supply of new homes – were down 16% in January and existing home sales were down 5.1%. Meanwhile, mortgage applications dropped 8.5% last week, according to the Mortgage Bankers Association. It wasn't just refinancing requests that fell but also new purchase applications.

On top of that, Tuesday saw the release of the Standard & Poor's/Case-Shiller 20-city home price index showing a drop of 0.1% in December compared to November, the second straight decline. Compared to 2012, though, home prices are up 11.3%.

According to CNBC contributor Gina Sanchez, founder of Chantico Global, homebuilders may have a tough time sustaining some of their recent growth. For example, luxury homebuilder Toll Brothers posted recent quarterly revenues of $643.7 million, 51.6% higher than last year.

"That had to do with the fact that in 2013, the housing market overhang was finally absorbed into the market," says Sanchez. "In fact, we saw some tightness in the market. You also had institutional investor buying – that also helped buoy prices – and, of course, ultralow rates."

These positive drivers will soon disappear, believes Sanchez.

"A lot of those things are going away," says Sanchez, who sees investor buying falling off. "And, with ultralow rates starting to rise – we've already seen a percentage point rise – that's going to make it challenging for the traditional buyer to go in. Prices are now so much higher; affordability is down. So, I don't expect that what we saw in 2013… is necessarily going to come true in 2014."

Despite attempts by homebuilders to keep new homes supplies from building up, a lot of new homes will hit the market later this year, according to Sanchez, and that could push prices – and homebuilder profits – lower.

(Read: 10 richest neighborhoods in US)

Talking Numbers contributor Richard Ross, Global Technical Strategist at Auerbach Grayson, believes the technicals show reasons investors in homebuilding companies should not worry.

"Housing doesn't concern me at all," says Ross. "Very quietly, this has been a very nice story here, one of the best stories on the board in early 2014."

Looking at a stock chart of the iShares US Home Construction ETF (the ITB) which tracks homebuilder stocks, Ross sees a base of support building up over much of 2013. After a consolidation period earlier in 2014, the ITB has broken out two weeks ago.

"That's textbook pattern and form," says Ross. "That tells you that the benchmark ETF of homebuilders is going higher. It's not too late at all and you want to be a buyer here on the heels of this early year strength."

To see the full discussion on housing and homebuilders with Sanchez on the fundamentals and Ross on the technicals, watch the video above.

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