Moving In on Housing Data

For a data junkie like me, the housing market has been challenging of late, in part because of the lag in reported data due to the recent government shutdown. While we've been catching up over the last few weeks, most of the hardcore housing data we've received still lags. Case in point: Two weeks ago, we learned that October new home sales surged compared to September and available inventory fell to its lowest level in several months. Nearly a month ago, October existing home sales were reported. That lack of timely data has led to speculation over the health of the housing market and weighed on shares of homebuilders. The SPDR S&P Homebuilders ETF (XHB) is down 1.4% over the past month and underperformed all the major market indices. That could all change this week when we finally get caught up on one of the more closely watched housing statistics: housing starts. The last reported figures for that data were in August, and while we've seen permits climb over the past few months, we have had no insight on housing starts. Sequential monthly increases were delivered in July and August, but we have no read on housing starts since. That changes this week when the Census Bureau finally reports housing starts figures for September, October and November, as well as November building permit activity. We have gotten some clues from Toll Brothers (TOL) and Hovnanian Enterprises (HOV) recently as to what the missing housing starts figures could look like. When Hovnanian reported better-than-expected October quarter results, CEO Ara Hovnanian said, Although our sales slowed from July through September due to the adverse impacts of higher mortgage rates, the sequester and the government shutdown, we are happy to report that our sales improved back to prior-year levels in October and exceeded last year's levels in November. When Toll Brother reported its fiscal fourth-quarter 2013 results less than a week ago, management shared that its backlog was up more than 50% exiting the year and cited favorable drivers in the form of pent-up demand, demographics and improving affordability. With both Toll Brothers and Hovnanian beating Wall Street earnings expectations by more than 25% each for their respective October quarters, it sets the stage not only for better housing starts figures but also good results from Lennar (LEN), KB Home (KBH) and LGI Homes (LGIH) this week. LGI is a newly public homebuilder and this represents its first quarter out of the box, which makes it rather likely the company will deliver sold results. One way to trade the likely favorable housing starts data would be to not only buy the XHB, but also pair it with an out-of-the-money call option, such as the January 2014 $31 call option that last traded at $0.50. That's a quick trade ahead of the housing-starts data coming this week. While there is opportunity in the homebuilding space for those who are looking to pick through the publicly traded homebuilders, be sure to do your homework and keep an eye on valuation. While PulteGroup (PHM) and Toll Brothers are trading at or better than 15x 2014 expectations, Hovnanian and DR Horton (DHI) are trading below 10x 2014 expectations. For those wondering, the homebuilder peer group's average is around 12.5x 2014 consensus earnings, and the group as a whole is expected to grow earnings better than 30% in 2014 vs. 2013.

Moving In on Housing Data

Be ready when the lag in housing data ends this week.

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