HOMEBUILDING STOCKS SET FOR GAINS
But investors may have to wait several months for payoffs as interest rates expected to rise, say analysts
SOME investors are betting on shares of homebuilders to outperform United States stocks at large, but with interest rates expected to rise they may have to wait several months before those bets pay off.
The US economy looks ideal for homebuilding stocks to benefit. The unemployment rate has fallen to its lowest level in more than 17 years and consumer confidence is near the highest levels in 17 years, according to the Conference Board.
And demand for housing in an already tight market is being supported by the many millennials seeking to purchase their first home, several investors said.
The US Commerce Department’s data on April housing starts will be released on Wednesday, followed by data on new-home sales on May 23.
But other factors could raise costs for homebuyers, potentially hampering home sales. A sharp rise this year in US Treasury yields reflects increasing worries about inflation and fears that the Federal Reserve will raise interest rates more aggressively than has been expected.
The yield on the 10-year Treasury note is used as the benchmark for mortgage interest rates; higher rates increase mortgage costs for home buyers.
The 10-year Treasury yield has briefly exceeded the three per cent mark, the highest level since January 2014 and more than 50 basis points higher than where it started the year.
The S&P Composite 1500 Homebuilding index has lagged the broader market, falling 16.9 per cent from its January 22 peak, which is more than three times the percentage decline of the S&P 500 from its high that month. Last year, the homebuilding index soared 74.8 per cent from the previous year.
Other factors also cast a cloud on the housing market. Last year’s federal tax overhaul put a cap on deductions for state and local and property taxes and lowered the amount of mortgage interest that is deductible, all of which results in higher costs for many homeowners.
Homebuilders have also pointed to rising costs for materials and labour in their earnings calls, though so far they have had little impact on their margins.
Shares of the five largest US homebuilders by market capitalisation jumped on April 4, when Lennar reported robust quarterly sales and raised its forecast for the year. Lennar’s shares climbed 10 per cent that day, and PulteGroup Inc, D.R. Horton Inc, Toll Brothers Inc and NVR Inc rose between 4.1 per cent and 6.4 per cent.
The stocks have given up much of those gains since then, even though homebuilders have continued to deliver upbeat results. Lennar shares have tumbled 13.7 per cent. D.R. Horton, NVR and Toll Brothers are down 3.9 per cent, 3.3 per cent and three per cent, respectively. Only PulteGroup has added to its April 4 gains, rising 1.8 per cent.
Homebuilders that sell units at multiple price points, from starter homes to luxury properties, and are active throughout the US are best positioned to withstand investors’ skittishness over interest rates, say analysts.
Next up to report is Toll Brothers, which focuses on the luxury market and is scheduled to release its quarterly earnings on May 22.
Still, some investors say this year’s industry underperformance looks like a normal response to the 2017 run-up.
Though housing starts have risen, hitting 1.319 million units in March, demand among home buyers has outpaced the limited housing supply in part because of the many millennials are entering the market.
“If (homebuilders) have solid orders and growth and hold their margins, they could work from here,” said Jonathan Woloshin, head of Americas equities and real estate at the chief investment office of UBS Global Wealth Management in New York.