Quiver Quantitative - In the shifting sands of the homebuilding market, short sellers are facing an unexpected reversal. The S&P (SPY (NYSE:SPY)) Composite 1500 Homebuilding Index has witnessed a notable resurgence, climbing over 20% since the tail end of October. This recovery has brought the index to a precipice, nearly reclaiming its position prior to the downturn that gripped it in July. Amidst this uptick, short sellers have found themselves cornered, with their cumulative paper losses for the year hitting a staggering $1.4 billion, according to S3 Partners. This resurgence also raises the specter of a short squeeze, a scenario where escalating stock prices could force shorts to cover their positions, further driving up the market.
The homebuilding sector's comeback has been substantial enough to prompt short sellers to buy back $1.3 billion in stock to mitigate their positions. The potential for a short squeeze in the sector has significantly intensified within the past month, S3 Partners' analytics suggests. The sector's robust performance is supported by shifting demographics among first-time homebuyers, as observed by Evercore (EVR) ISI analyst Stephen Kim. Buyers now entering the market are older and possess the financial resilience to navigate higher rates, a trend that shorts may not have fully anticipated.
Homebuilders have adapted to market demands by focusing on smaller, more affordable housing, effectively reducing average selling prices and aligning more closely with buyer expectations. This strategic adjustment, coupled with a retreat in the US 10-year Treasury yield and lending incentives, has fortified the sector's position, suggests Bloomberg Intelligence analyst Drew Reading. The short squeeze potential is particularly high for certain homebuilders, including KB Home (KBH), LGI Homes (LGIH), Cavco Industries (CVCO)., and Dream Finders Homes (DFH).
However, the landscape is not uniformly bullish. Even as the sector recovers, short sellers continue to take bearish stances, with the value of shares shorted increasing by $926 million over the last 30 days. Yet, there's also evidence of shorts retreating, indicated by $141 million worth of short covering. This dichotomy in trading behavior underscores the ongoing debate about the sector's trajectory and the potential for future gains or corrections.
This article was originally published on Quiver Quantitative