Photo: MdE (de), Wikimedia Commons
Since October we’ve been writing about the resurgent homebuilder stocks, which are now nearing a 4-year high.Supporting this rally has been a very beaten down sector coupled with the first glints of a rebound in fundamentals.
Anyway, in a note out this morning, Raymond James announces that it’s Pulling the Plug on “Hope Trade 2012”.
We are downgrading ratings on several of our covered homebuilders following the sector’s significant outperformance in recent months (since mid-November homebuilding equities have climbed 31%, outperforming the S&P 500’s 7% rise), which for an eighth consecutive year has continued a familiar seasonal pattern we have dubbed the “Hope Trade.”
What’s the problem?
First, the data, they argue, really isn’t that good.
Sales likely to disappoint. For the momentum in homebuilding equities to continue, we believe new housing data points, earnings, and comments on the spring selling season all need to significantly exceed expectations, which we think have moved considerably higher this winter along with valuations. Unfortunately, we believe the housing data over the next few months (while it likely improved from 2011) will disappoint, as we anticipate builders will face an uphill battle converting traffic to actual sales contracts and closings. Underlying our concerns, more evidence is emerging that mortgage availability to potential homebuyers is not improving, and in fact may be tightening further.
What’s holding the market back? Basically tightening of lending (again) and government regulations.
The dysfunctional mortgage market. From our perspective, the biggest obstacle to getting a housing market recovery off the ground is the current lack of mortgage availability for previously well-qualified buyers. In the meantime, banks’ collective uncertainty over capital reserve requirements, the future definition of a QRM, ongoing mortgage litigation, and put-back claims from investors and government-sponsored enterprise (GSEs) have left lenders unwilling or unable to extend credit to almost anyone but the very best borrowers. And even those qualified homebuyers willing to commit to a purchase also must navigate a maze of new documentation requirements and underwriting verifications, not to mention an appraisal process that continues to be weighed down by distressed transactions.
Citi cutting back on lending. Last week, Citigroup (the fourth-largest mortgage originator with a 5% market share, according to Inside Mortgage Finance) announced it will stop originating home loans through brokers starting February 8. Citi will continue to originate loans through its own retail network and correspondent banks. Nevertheless, we believe Citi’s move away from mortgage brokers further supports our view that banks remain reluctant to lend and want to control the underwriting process to reduce risk and avoid future mortgage put-backs.
Beyond that, they say the administration is holding back new mortgage activity with its focus on investigations, and helping current mortgage-holders, rather than new mortgage holders.