From Swarup Gupta: Housing stocks were dealt a blow by the release of dismal sectoral data on Feb 26. Home Depot’s (HD – Free Report) dismal fourth-quarter numbers worsened matters. Consequently, the iShares Home Construction ETF (ITB) and the SPDR S&P Homebuilders ETF (XHB) each declined at least 0.6%.
Incidentally, 2018 was the most disastrous year in a decade for housing stocks. But homebuilders have executed a spectacular recovery this year with the ITB and the XHB rallying 17.7% and 19.4% year to date.
The primary catalyst for these gains is the Fed’s new-found dovishness. The steady pace of the housing recovery since 2008 and demographic factors are other positives working in favor. This means that homebuilders are likely to snap up substantial gains this year.
Dismal Data But With a Silver Lining
According to a Commerce Department report released on Tuesday, housing starts declined 11.2% last December. This marks the slowest rate of construction since September 2016. The metric has declined 10.2% in the last 10 months primarily due to prohibitively high home prices.
Meanwhile, the Case-Shiller 20-city home price index increased 4.2% on a yearly basis in the same month. This again marks the slowest growth rate seen since November 2014.
But the drop in prices could end up addressing the current demand-supply mismatch. Also, sector specialists think last year’s pace of increases was unsustainable. At a time when economic data was dismal, prices increased at twice the pace of inflation. Such a situation is unlikely to persist.
Dovish Fed, Steady Recovery to Fuel Gains
Both the ITB and the XHB had their most dismal year since 2008 last year. A large part of these declines can be attributed to the four rate hikes undertaken by the Fed. This significantly tightened monetary conditions and momentarily thwarted a long-running market rally.
However, in January, the Fed hinted that it was putting the process of rate hikes on hold. This bodes well for homebuyers since a rate hike significantly increases the cost of home mortgages. Also, the yield on the 10-year Treasury note has tracked lower this year, thanks to trade tensions and global slowdown concerns. This has also helped to step up applications for mortgages.
It comes as no surprise that several major homebuilder stocks have garnered significant gains year to date. Shares of D.R. Horton, Inc. (DHI – Free Report) , KB Home (KBH – Free Report) , Lennar Corporation (LEN – Free Report) , PulteGroup, Inc. (PHM – Free Report) and Toll Brothers, Inc. (TOL – Free Report) have scooped up 17.1%, 21.5%, 26.3%, 5.6% and 13.2%, respectively.
Demand Among Millennials to Enhance Long-Term Prospects
Industry watchers think the long-term prospects of housing remain bright because millennials are rapidly entering prime household formation age. Initially, reluctant to purchase homes, this class of buyers has rapidly changed their buying behavior.
This could result in a significant spurt in demand over the next five to 15 years. With a number of factors likely to power homebuilding stocks this year, it would prove profitable to watch this space closely at this time.
The SPDR S&P Homebuilders ETF (XHB) was trading at $38.66 per share on Friday afternoon, up $0.29 (+0.76%). Year-to-date, XHB has declined -12.48%, versus a 5.42% rise in the benchmark S&P 500 index during the same period.
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