Double Dip Will Hit Housing Hard

06/15/2010 11:06 am EST

Focus: OPTIONS

Michael Shulman

Editor, Short-Side Trader

Michael Shulman, editor of ShortSide Trader, says housing stocks are vulnerable to a sell-off, especially if the economy weakens.

The double dip is right around the corner, if not already beginning.

In past recessions, the Federal Reserve could lower interest rates to spur purchases of homes and automobiles, and Uncle Sam would spend more money.

There is no political will for another large stimulus package. Even a relatively modest $80-billion dollar proposal that's now on Capitol Hill is meeting resistance from moderate Democrats.

With the lack of stimulus, the big loser is housing. There is no help in sight, and with interest rates at zero the Fed can't use a rate reduction to stimulate housing. Finally, the tax credit is gone and there is no willingness on The Hill to extend it.

Direct federal support is hitting its limits. Fannie Mae and Freddie Mac are now making 97% of all loans, and they're both going to hit their statutory lending caps set by Congress before the fall elections—and these caps might not be increased.

There is no jumbo mortgage money available to anyone, and homebuilders can't get the credit they used to have available to lend directly to buyers.

The US is less than one-third of the way through foreclosures, and foreclosure remediation is a dismal failure, as roughly two-thirds of people getting help eventually default, anyway.

There is too much housing inventory, the inventory is growing, and more than one million homes in default or foreclosed on have yet to be listed. I expect this situation to continue, which will only put more pressure on prices and new home building through 2012.

The bottom line is that housing and the homebuilders are about to fall off a cliff.

Beazer Homes USA (NYSE: BZH) August 5.00 Puts (BZH 100821P00005000)’s underlying stock is rolling over with the sector. These puts are deep in the money and may soon catch the eye of day traders. I'm raising the Buy Under price to $1.35, and I want you to buy on any pullbacks. (They traded late Monday at $1.15, and the stock closed above $4.00—editor.)

KB Homes (NYSE: KBH) October 12.00 Puts (KBH 101016P00012000): The stock has broken down but the $12 level may provide some short-term support. These are October puts so we'll stick with them. I'm raising the Buy Under price to $1.65. Buy on pullbacks. (They traded at $1.15 Monday, and the stock closed below $13—Editor.)

SPDR S&P Homebuilders ETF (NYSEArca: XHB) September13.00 Puts (XHB 100918P00013000), an ETF for the housing industry, has been rolling over. I am raising the Buy Under price on the XHB [puts] to 72 cents. (They closed at around 36 cents, while the ETF closed above $16—Editor.)

(Editor’s Note: Shorting stocks is only for extremely risk-tolerant investors who can afford to lose the money they’re putting up.)

Subscribe to ShortSide Trader here…

Related Articles on OPTIONS