Tuesday’s better than expected headline and core CPI numbers showed that inflation is easing which should entice the Federal Reserve to pause rate increases and start cutting rates in early 2024. This would mean that mortgage rates have topped out and are poised to trend lower, exemplified by the 30-year fixed mortgage rate dipping below 8.50% and 15-year to 7.40%.

With mortgage rates declining, one of the biggest beneficiaries will be the homebuilding sector which should see a resurgence of home buying as mortgage expenses decline. Homebuilder short sellers, who had been enjoying price weakness in the sector from late July to late October, should brace themselves for mark-to-market losses and short squeezes as homebuilder stock prices rebound back toward year-to-date highs.

There has been short covering in most of the homebuilder stocks this year with $1.27 billion worth of buy-to-covers hitting the tape in 2023. This short covering was in response to a $2.43 billion increase in the value of shares shorted throughout the year – shorts were being squeezed out of their positions due to mark-to-market losses.

Although in the second half of the year we have seen a flip flopping of sentiment with $327 million of increased short selling from 7/14 to 10/15 as the market value of shorted homebuilder stocks declined by $916 million. Shorts were actively increasing their positions in a downward trending market.

But over the last thirty days, as the market value of shares shorted increased by $926 million, homebuilder shot sellers started reducing their exposure with $141 million of short covering. With homebuilder stock prices spiking we should not only expect this short covering trend to continue but for it to accelerate.

Homebuilder short sellers are down -$1.42 billion in year-to-date mark-to-market losses, down -27.44% for the year. A quarter of those losses occurred on Tuesday with shorts down -$375 million, -7.03%, for the day. Homebuilder shorts are now down -$1.00 billion, -19.00%, for the month of November.

The homebuilding sector is not a crowded short sector with the average Crowded score increasing from 26.81 to 28.04 over the last thirty days, well under the U.S. market average of 32.54. LGI Homes Inc. (LGIH) and Dream Finders Home Inc. (DHF) are the only two homebuilder stocks with Crowded scores over 60.

As the mark-to-market losses in the sector accumulate, the squeeze risk in the homebuilders sector has also increased. Thirty days ago, the average Squeeze score for the homebuilder sector was 24.81, but after the recent surge in stock prices the average Squeeze score has doubled to 49.76, well above the U.S. market average of 37.49.

While the average Squeeze score in the sector has increased, it has been an across-the-board increase and not limited to just several stocks. The only homebuilder stocks with Squeeze scores 60.00 and over are KB Home (KBH), LGI Homes Inc (LGIH), Cavco Industries Inc. (CVCO), Dream Finders Homes Inc. (DFH and Beezer Homes USA Inc. (BZH).

The recent surge in stock prices in the homebuilder sector has increased the squeeze risk in most of the stocks in the sector and as the mark-to-market losses in stocks reach the short squeeze pain threshold of short sellers. We should expect an increased volume of short covering in the sector, especially as mortgage rates continue to decline and home buying demand increases. With month-to-date mark-to-market losses in most homebuilder stocks already nearing or above the -20% level we should see short sellers with lower conviction trimming their exposure and if losses continue to grow there could be a stampede of short sellers looking to exit their trades before short squeezes push stock prices even higher than just long-buying demand alone.

Our Blacklight SaaS platform and Black App provides an up-to-date view of short selling and short covering on an equity, sector, index, or country-wide basis allowing investors\traders to better manage their existing long and short positions.

The Black MaP and Black App products provide a total view of long and short positioning in the market with a breakdown between Active\Passive long investors, 24 Fund type entities, over 50k securities globally across 108 countries and data from 58 regulatory exchanges.