When PulteGroup's (PHM) stock is up huge when it has a 1% increase in net sign-ups year over year even as first time orders decline 13%, that says you may finally be finding a bottom for his bedraggled group.
If you look at what led this market down it was housing. The Fed's endless increases in the rates it controls has just stopped this industry in its tracks by making homes much less affordable. In fact, what boosted Pulte's numbers, when all said and done was active adult buyers with orders increased by 22%.
I know that investing should not be based on irony but you can draw a line between what the Fed's been trying to do and what's finally occurred. Home prices had been going higher throughout the country and that's pure inflation. The Fed's right to stop it.
But now, with mortgage rates at 5%, prices have become unaffordable for whole swaths of the country. As Pulte said on its call, it's not just the combination of higher prices and high mortgages, it's also the penalty of selling a house where you have a low mortgage for a new house with a high one.
Real estate's a funny business. The cycle of housing goes like this. Prices go up and up and up as multiple bidders attempt to buy the same home. Then one day the price has gotten too high and not only are there no longer multiple bidders. There no bidders.
We are now at this point at many areas of the country. In some locations -- notably San Francisco, Seattle and New York -- prices have already started trading down.
But in other areas sellers keep waiting for buyers to come in and kick the tires.
Traffic, however, is way down because of the affordability issue.
So what happens is this: prices stay the same for a bit but there are no validating transactions.
There are only two ways to get to where properties trade. First, mortgage rates have to come down. That's not going to happen any time soon because the Fed is determined to keep them up to cool housing, ironic because they have succeeded beyond their wildest dreams but they won't acknowledge it.
The other is to cut prices and offer incentives and that, too, is another win for the Fed. I believe that much of the country is now adjusting to the lack of affordability. Now because of a shortage of land to build homes you do not see the true supply demand imbalance that would cause housing to crash, I believe if the Fed keep raising rates four times we will indeed get that crash and you sure don't want to be looking up your home price on Zillow as it will be going down by the week.
Now I don't want to be a downer. I think that housing got too cheap because the Fed was determined to make it so there was a ready pool of buyers taking advantage of low mortgages. I have a 2.575 mortgage on my house which made it spectacularly affordable. Double that mortgage? No thanks. I am sure many of you think the same.
Now even after Pulte stock's strong run-up -- is up 8.8% today -- it is down 32% for the year. Call it a relief rally. But I think the ultimate takeaway here is that the first group to roll over, the homebuilders, have finally gotten so beat up that a 1% gain year over year in orders is enough to satiate the sellers and bring in buyers.
The fact that they have finally reached a level where buyers see value is encouraging. Even as I would say that if you buy them you are going to have to endure a series of months where home prices nationwide are going to go lower, maybe a lot lower, before the Fed declares victory and mortgage money comes down enough to entice those on the sidelines to do some buying.