For all the talk about an impending shift in the housing market, naysayers aren’t heavily betting against homebuilders. But it could be starting to pay off for those that have.
Last week, shares of highflying Newport Beach-based William Lyon Homes Inc. dipped after the homebuilder reported new home orders that were below what one analyst had expected.
William Lyon’s orders, or contracts to buy homes under construction, were 834 for the third quarter. JMP Securities analyst James Wilson, one of the few analysts to follow the closely held company, had expected 925 orders and downgraded the stock.
The Street.com called the resulting drop of about 5% a “victory for short sellers”,investors who borrow shares on a bet they’ll decline in value before they have to return them and pocket a gain.
Odds are short sellers also have made some money on Orange County’s other publicly traded homebuilder, Irvine’s Standard Pacific Corp. After a big run-up this year, Standard Pacitic’s shares are off about 20% in recent weeks.
But, so far, the betting against homebuilders isn’t heavy. The number of shares borrowed by short sellers was about the same last week as last year, according to Joel Locker, an analyst with Carlin Financial Group in New York.
Locker tracks 18 homebuilders with data from New York’s Bloomberg LP.
Last week hedge funds and other investors held 4.1 million borrowed shares of Standard Pacific, or 6% of all outstanding shares, Locker said. The total was down 16% from 4.9 million shorted shares a year ago, he said.
The total peaked at 5.1 million shares in February, he said.
“They have been heavily shorted for three years,” Locker said of homebuilders. “It hasn’t been a winning proposition yet.”
Even with Standard Pacific’s recent decline, the company’s shares still are up about 23% for the year. Last week Standard Pacific counted a market value of $2.6 billion.
The shorting is slightly more dramatic with William Lyon, a smaller builder with fewer shares outstanding and most controlled by its chief executive.
Investors last week shorted 915,000 shares of the builder, or roughly 10% of all outstanding shares, according to Locker. The total was up 22% from a year ago.
William Lyon’s shares were up about 110% for the year last week after big gains following a failed buyback attempt by Chief Executive William Lyon and an analyst’s earlier favorable rating.
Of the 18 homebuilders Locker tracks, about half saw a rise in short positions last week,not particularly remarkable, he said.
Meanwhile, the rate on a 30-year fixed mortgage has been approaching 6% since early September. Rates on adjustable mortgages have been slowly rising after hikes in a key short-term rate by the Federal Reserve Bank.
Some of the shorting on builders has come from investors seeking a hedge against rising interest rates in general, according to Richard Eckert, senior research analyst with Newport Beach’s Roth Capital Partners LLC.
Several analysts have turned against homebuilders as well as mortgage companies based here, fearing a housing market reversal.
J.P. Morgan & Chase Co. last month downgraded shares of Standard Pacific to “underweight” from “neutral.” The move was notable, since it simultaneously upgraded other builders.
Some analysts said Standard Pacific could be too heavily concentrated in super-hot California, despite efforts by Chief Executive Stephen Scarborough to diversify into other states in recent years.
On the mortgage industry side, three separate analysts downgraded Irvine-based subprime lender New Century Financial Corp. in September and August.
Also in August, JMP Securities downgraded Newport Beach’s Impac Mortgage Holdings Inc. for the second time this year. Impac is a real estate investment trust that owns mortgages.
New Century makes loans in many states, but is heavily exposed to California, where there has been dramatic home price appreciation since 2000.
