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DR Horton, Pulte, Ryland, Toll Bros, Hovnanian Risk Overbuilding Homes on Spec

Stocks in this article: DHIHOVPHMRYLTOL

 

NEW YORK (TheStreet) -- The demand for new single-family homes is a key to stronger economic growth on Main Street, USA. In my judgment, and based upon the data I provide in this post, homebuilders are overbuilding new single-family homes, which will be difficult to convert to new home sales.

DR Horton (DHI) , Pulte Group (PHM) and Ryland Group (RYL) are profiled because they missed their latest quarterly earnings reported between July 24 and July 31.

I chose Toll Brothers (TOL) as the stock declined even though the company beat analysts earnings-per-share estimates on Sept. 3.

The fifth homebuilder is Hovnanian (HOV) , which reported an EPS beat on Thursday but the stock is down 35% for the year to date.

Read More: 10 Stocks George Soros Is Buying

These homebuilders are among the 19 components of the PHLX Housing Sector Index, which is down 2.1% year to date. All five homebuilders profiled today are underperforming the index.

Let's take a look at the weekly chart of the housing sector index.

Courtesy of MetaStock Xenith

The weekly chart for the housing index (199.00) clearly illustrates what I have been calling the 60% housing recovery. The housing index peaked at 293.66 set in July 2005, a year before the housing bubble peaked. Compared to the S&P 500 this index is still down 32% since its high, while the S&P 500 is 27% above its October 2007 high.

The weekly chart shows the Fibonacci retracement of the 82% decline from its July 2005 to its March 2009 low at 54.31. The housing index has been trading back and forth around the 61.8% retracement at 202.05 since May 2013. The technicals thus support my call of a 60% housing recovery.

The National Association of Homebuilders Housing Market Index, which scales between zero and 100 is at 55 above the neutral 50 reading but is below the 60 threshold.

Single-family starts rose b y 8.3% to an annual pace of 656,000 units in July continuing to oscillate around the 600,000 threshold when the potential is 1 million to 1.2 million. This is another indication of a 60% housing recovery.

Read More: Many Bank Mortgage Cases Remain as Prosecutor Looks to Get Rich

While single-family starts are rising new home sales have declined. The annual rate of new home sales fell 2.4% in July to 412,000 units. New home sales are sales only from community developments, while single-family starts include homes built in lots not in developments.

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