The last Housing Market Review covered data reported in October, 2017 for September, 2017. At the time, I lamented having too small an exposure to home builders while the entire sector rallied nearly non-stop. I was counting on seasonal patterns to deliver at least one buyable dip ahead of the seasonally strong period starting in November. The briefest of dips did arrive in the form of angst over the Republican tax reform bill. In a pattern familiar in this bull market, the angst lasted exactly one day before these stocks resumed their rallies.

The iShares U.S. Home Construction ETF (ITB) has not traded higher since early 2007. ITB is up a whopping 57% year-to-date with a large chunk of that gain coming since the September breakout to a new high. ITB is up 23% since then.

Source: FreeStockCharts.com

The iShares US Home Construction ETF continues along an uptrend defined by its upper-Bollinger Bands (BBs).

I thought the selling was the beginning and not the end of a choice entry point; sellers lack follow-through. Once ITB completed a reversal of the one-day loss, I assumed the next phase of the rally was underway. D.R. Horton (DHI) was a key tell as the home builder which fared the best in the middle of the one-day sell-off: DHI closed near flat after a sharp intraday bounce that day. DHI erased that marginal loss in two days and returned to the racetrack from there. In just ONE MONTH DHI is up another 13%.

D.R. Horton  barely flinched in the face of tax reform angst. The monster rally continued apace from there. DHI trades at an all-time high, first set two months ago in October.

With my hand “forced”, I fired up my buying plan. I focused on the stocks that looked “cheap” before and after the day of angst. I finally made the plunge into Five Point Holdings (FPH) and M.D.C. Holdings (MDC). MDC in particular experienced the double-whammy of reporting less than stellar earnings news on the day of angst. The stock is still working on its own complete reversal. Per my trading plan, I bought after the 200-day moving average (DMA) appeared to hold as solid support.

Five Point Holdings is now pivoting around its IPO price. The angst over the tax reform plan seemed to wash out the “last” sellers.

M.D.C. Holdings had a near picture-perfect bounce of 200DMA support. The stock quickly proceeded to break through 50DMA resistance and then successfully test it as fresh support.

The day of angst stopped me out of my position in Tri Pointe Group (TPH) (set to preserve my profits), but I decided not to climb back in. Interestingly, TPH lost 2.6% on Friday, December 1st when ITB managed to GAIN 0.7% on its bounceback from earlier selling in the day. Other regional builders like Century Communities (CCS) and LGI Homes (LGIH) also ended the day with losses. I will be watching for a potential divergence going forward.

I am still taken aback by the breathless gains in home builders this year. For four years, ITB churned with a seasonal bias that allowed me to cycle through multiple bullish trades. I was clearly not quite prepared for a distinct change in the trading behavior. Panning out, I see that 2017 was a major breakout year with similarities to 2012 when home builders surged off major lows. The between years served as a very extended period of consolidation with a slight upward bias. The big question for 2018 will be whether 2017 priced in years of subsequent good news just as 2012 did for the 2013 – 2016 period. Unlike 2012, home builders are at highs in sentiment, home prices are relentlessly increasing, inventories are tight, labor and materials are tight, and demand is quite strong. At least housing bears still expect the market to collapse at any minute.

Source: Yahoo Finance

The weekly view of the iShares US Home Construction ETF  shows two one-year long rallies have dominated the post-recession recovery.

New Residential Construction (Housing Starts) – October, 2017
Single-family housing starts for September were revised upward from 829,000 to 833,000. October starts increased month-over-month by 5.3% to 877,000. On an annual basis, single-family housing starts eked out a gain of 0.7%, the lowest year-over-year growth rate since August, 2016 (-1.4%).

Source: US. Bureau of the Census, Privately Owned Housing Starts: 1-Unit Structures [HOUST1F], retrieved from FRED, Federal Reserve Bank of St. Louis, November 27, 2017.

The uptrend in single-family housing starts continues albeit at a slowing annual growth rate.

After three months of wide deviations, the regional changes were more uniform for the previous three months. Wide deviations returned for September and October. The Northeast, Midwest, South, and West each changed -13.2%, 10.4%, 3.0%, -5.6% respectively in October. For September these percentages were, respectively, 17.7%, 10.5%, -5.6%, and 26.1%. The strong starts in the West came to an abrupt end but were undoubtedly due for some cooling. The South is bouncing back from the hurricanes in Florida and Texas.