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Dec 4, 2018

S3 Analytics: Homebuilder Shorts up $175 million on Sector Weakness

The Homebuilding Sector is down 5.18% in mid-afternoon trading after Toll Brothers (TOL US) reported a 13% year-on-year decline in orders, especially in the luxury California market, while still reporting an increase in net income which beat analysts’ expectations. TOL was down 10% just after the open but has recouped most of its early trading losses and is now down 1.73% on the day. Fears of higher interest rates and increased building costs continue to depress share prices in the sector.

There has been a recent upswing in short selling in the Homebuilding Sector after short interest in the sector fell by almost a third to $2.96 billion at the end of October. Since then, short interest has increased by $424 million, or 14.33% to $3.38 billion. The largest increases in short selling occurred in Lennar Corp (LEN US) +$192 million, PulteGroup Inc (PHM US) +$164 million and Tri Pointe Group (TPH US) +$43 million.


Traders have been increasing their short exposure in the Homebuilding Sector as higher mortgage rates dampen buyer enthusiasm. With futures implying a Fed Funds rate of over 2 5/8% by the end of 2019, mortgage rates do not look to be decreasing in the near or medium term. For home sales to increase we will have to see greater home price affordability in both the low and high end of the housing market coupled with consistent wage growth and minimal inflation erosion of buying power.

Short sellers in the Homebuilding Sector have been profitable in 2018, up over 36% and finding a winner in every security in the sector. Prior to today’s sector-wide price weakness, shorts had given back $159 of the mark-to-market profits in November-December. Today’s over $170 million in mark-to-market profits has reversed their near-term losses and spurred on more short selling in the sector. We’ve seen short selling activity in Pulte Group and Lennar, while some short covering in DR Horton and Toll Brothers. In the near term, short interest will probably not get close to the $4.3 billion level we saw at the end of 2017, but if sector wide price weakness continues, we should see short interest top $3.5 billion by the end of the year.


Want deeper insight into the above analysis?
Contact:  Ihor.Dusaniwsky@S3Partners.net
                 Managing Director Predictive Analytics, S3 Partners, LLC
The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.


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