Last Tuesday, homebuilder Toll Brothers Inc. (NYSE/TOL) delivered some bad news that should not have surprised you. Toll indicated that its previous forecast for the number of homes to be built in 2006 was too optimistic. For 2006, Toll slashed its home delivery estimate to between 9,200 to 9,900 homes, down from its previously estimated 9,500 to 10,200 homes.
Like many businesses in the housing sector, Toll is facing the wrath of higher financing rates for homebuyers, along with a previously heated housing market that is now showing signs of weakening. The numbers for December, 2005 showed Housing Starts dropping below two million to 1.933 million for the first time since they fell to a reported 1.836 million in March, 2005. Building Permits for December also fell sequentially to 2.068 million, the lowest level since 2.05 million was reported back in May, 2005.
Home sales in 2006 are expected to decline year-over-year according to The National Association of Realtors (NAR). With the NAR expecting the 30-year fixed-rate mortgage to hit 6.9 percent by the end of 2006, estimates call for existing home sales to decline 4.7 percent year-over-year and for new home sales to fall 8.5 percent year-over-year.
The housing market may have peaked. While I do not expect a major decline in housing prices and development, I do feel the easy money has been made in the sector.
Housing stocks, which have made a great run since the housing bottom in 1991, have been on a steady uptrend ever since. For instance, Toll traded at a 52-week low of $29.29 on February 7 and is showing more technical signs of weakness. The chart shows a moderate bearish “head and shoulders” formation with the neckline at around $30. With the decline below $30, we could see more weakness in 2006.
When looking for sectors to invest in, I suggest you do not look at housing, despite the apparent attractive valuation. Success this year will be based on trading the correct sectors and I do not believe housing will be one of them. Try gold, oil, and commodities.