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Housing Stocks Are Building a Strong Foundation

4 March 2015 in Trading Ideas

Don’t tell the nation’s homebuilders that existing-home sales suggest the housing recovery is lukewarm at best – they’re too busy enjoying a renaissance.

As the Wall Street Journal recently pointed out, many economists and analysts say that the recent strong reports by homebuilders provide a pretty good sign that this spring season has gotten off to a strong start.1

That signal hasn’t been lost on investors, who have pushed the stocks of these companies higher.

The Housing Recovery motif has gained 10.5% in the past month. In that same time, the S&P 500 has increased 4.8%.

Over the past 12 months, the motif has increased 0.8%; the S&P 500 is up 16.9%.

More encouraging signs were revealed last week. Meritage Homes said it landed contracts in January to sell 606 homes, a 48% increase from a year earlier. Meanwhile, Toll Brothers reported that its orders so far in February were 13% greater than a year ago, following its 16% gain in orders for its fiscal quarter ended January, 31 2015.

Those reports follow positive results posted by other builders for January, including Taylor Morrison Home and Standard Pacific Corp.

(Shares of all four of the above companies are in the Housing Recovery motif).

However, as the Journal noted, it’s hard to know what to make of other contradictory indicators of the housing market. For example, the National Association of Realtors’ gauge of existing-home sales registered its slowest pace in nine months this past January, and the chairman of the Index Committee at S&P Dow Jones Indices recently declared that the “housing recovery is faltering.”

Which to believe? The Journal pointed out that the new-home figures are in fact a more recent indicator, given that they track orders from recent weeks while the Realtor and S&P/Case-Shiller Home Price Index figures track finalized home sales initiated a month or more ago.

Second, some economists and analysts have noted that inventory of existing homes listed for sale is low, which is a boost to the new-home market, according to the Journal. The Realtors reported a 4.7-month supply of existing homes for sale in January, meaning it would take that long to burn through the available inventory at the current sales pace. The general gauge of a normal market is a six-month supply, the article said.

Other potential factors are weather and time of year. Sales in the year-ago period were stymied by the infamous “polar vortex” of unusually harsh weather, which likely made gains this January appear large by comparison.

In addition, January typically isn’t a huge month for home sales, noted one economist who said this would make it difficult to say a trend is in place.

Still, the Journal reported that builders have attributed their sales gains to forces spawned by the improving economy, which logically should benefit both the new-home and existing-home markets. Job and wage growth is better now than a year ago, and federal regulators have pledged to slowly loosen mortgage-qualification standards.

Mounting student debt and high home prices remain, but mortgage rates are near all-time lows at 3.76%.

As the winter freeze begins to thaw, it’s likely that the spring reports from homebuilders will do a lot to determine whether their stocks continue to heat up.

1Kris Hudson, “New-Home Sales Are Surging. Why Aren’t Existing Homes As Hot?”, wsj.com, Feb. 24, 2015.