Back in the spring of 2005, when the housing mania was just shy of its record peak, I wrote that Wall Street analysts covering the sector were nearly all bullish, even though the stocks by that stage had soared to silly multiples of their own net asset values.
Among the analysts covering the five big homebuilders --
-- buy recommendations outnumbered sells by 14 to 1.
Fourteen to one.
And out of 68 published research notes, I could find just three urging clients to sell. Three.
As I warned at the time in a column for the
, when the last bears give up, it's time to get nervous.
By now, the rest of America has finally woken up to what smart investors have known for at least two years: The housing bubble was the new
And the bust is going to be long, ugly and painful.
The question smart investors want to know the answer to now: When are we going to reach the opposite moment -- the glorious moment of capitulation?
That, of course, will be the moment to start buying homebuilding stocks. There are two exchange-traded funds that track the sector, the
S&P Homebuilders SPDR
Home Construction iShares
You can usually tell when you get there, because all the bulls have finally turned bearish... or gone bust.
Capitulation on Wall Street will come long before the actual housing market itself starts recovering.
And we're surely not there, but we are certainly getting closer.
Consider the signs.
Now that the shares have collapsed in price, bulls are in desperately short supply on the Street. For those same five homebuilding stocks I tracked back in the spring of 2005, sell notes now outnumber buy notes.
And out of 63 published notes, just nine are buys. Nine.
I should add that few of these have been published in the last month.
Even Fidelity Investments'
Housing & Construction (FSHOX) mutual fund has largely given up on the sector.
The fund has only three homebuilders in its top 10 holdings and none in its top five, according to its May 31 filings. The three are DR Horton, Pulte Homes and Lennar. Most of its biggest holdings are either turnaround stories like
or commercially-oriented construction like
A few years ago the fund was loaded up to the gunwales with homebuilders.
When your specialist homebuilding fund pretty much gives up on homebuilders, it tells you something.
One of the few names still willing to own shares in the sector is Bill Miller at
Legg Mason Value Trust (LMVTX). He has a great long-term record, though he has been suffering for being way too early into this sector; he was buying early last year.
The Nasdaq had to fall 75% from its peak before it hit bottom. Homebuilding stocks, by contrast, have so far fallen 63%. (When the Nasdaq was down this far, it was at 1,900.) If this burst bubble follows the last one, homebuilding shares will have to fall another third before the slump ends.
The sector has been in a rout all summer, falling by double digits each month.
But has the decline started to slow? Keep an eye on the Home Construction iShares. Since Aug. 15, it's only eased 58 cents, to $23.10, despite further waves of gloomy headlines.
Maybe I'm looking too hard for contrarian signs that the end of the slump is near. This could be a pause before another slide.
But at times like these it is hard to keep in mind the obvious point that the shares on Wall Street are, obviously, a lot closer to the bottom than they are to the top.
My guess is that gutsy long-term investors may find a great buying opportunity in this sector sometime this fall.
In keeping with TSC's editorial policy, Brett Arends doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Arends takes a critical look inside mutual funds and the personal finance industry in a twice-weekly column that ranges from investment advice for the general reader to the industry's latest scoop. Prior to joining TheStreet.com in 2006, he worked for more than two years at the Boston Herald, where he revived the paper's well-known 'On State Street' finance column and was part of a team that won two SABEW awards in 2005. He had previously written for the Daily Telegraph and Daily Mail newspapers in London, the magazine Private Eye, and for Global Agenda, the official magazine of the World Economic Summit in Davos, Switzerland. Arends has also written a book on sports 'futures' betting.