No one’s buying homes in America, never mind homebuilder stocks. Companies such as Pulte , DR Horton and Lennar may even be the most contrarian investment today.
The outlook for the housing market, as reported by the mass media, is not good. In case you’ve missed them, here are a few of the headlines from over the past several weeks:
“No recovery in sight for U.S. housing market”
“July real estate market fell short of expectations”
“Housing data shows sector is still weak”
And so it’s true, housing reports have been about as upbeat as a mortuary trade magazine. In the recently released July report from the Commerce Department, housing starts decreased by a seasonally adjusted 1.5 per cent from June, while permits for new construction fell 3.1 per cent. As a frame of reference, July’s annualized 604,000 is a far cry from the 2.07 million homes that were started in the heyday of 2005.
As a result, shares of homebuilders have been crushed. The S&P 500 homebuilders index has plummeted 27 per cent over the past month, twice that of the broader index. (That S&P sector comprises Putle, DR Horton and Lennar.) Of 154 industries that make up the benchmark S&P 500, homebuilders are ranked 147th during that period.
But there’s encouraging news. For one, housing starts in the U.S. Northeast were up 35 per cent in July from June. Also, overall housing starts are up 10 per cent from last year, with demand for large rental units growing significantly – up 67 per cent.
However, while the Northeast (and the South, to a lesser extent, which showed month-to-month improvement of 5 per cent) has looked strong, the Midwest is suffering. Starts in the Midwest fell 38 per cent from June, and 17 per cent from a year earlier.
With the absence of any exciting improvement in housing stats, shares of large homebuilders haven’t been able to get any love on Wall Street. Many are trading at book value (or below).
It’s definitely a contrarian bet, but I’m starting to think it might make sense to consider homebuilders for investment. My thoughts are that, while the housing market doesn’t look spectacular, there are signs that could lead to a catalyst for some of the homebuilding stocks.
For one, rentals in many regions are at sky-high levels. A recent article in the Boston Globe noted that rents in the Boston area had hit a median level of $1,665, with vacancy rates falling to a decade low. People are opting to rent lower-quality units at high prices.
Certainly, consumers are scared of mounting economic problems. Buying a home, once thought to be the ultimate achievement for any working individual or couple, has become an afterthought. Why buy a house when there’s a chance you might lose your job or have the home deteriorate in value after a purchase?
Yet, with 30-year mortgage rates plunging to almost 4 per cent, when does this newly attached stigma associated with buying a home disappear? When do people start to realize that buying a home at historically low rates is a better option than overpaying for a less-than-desirable rental unit? And if this demand starts to pick up, demand for new homes will only improve.
Sure, the situation is a lot different in other parts of the country. In areas where excess supply might take years to catch up with demand (such as Arizona, Las Vegas, among others), the length of recovery will likely exceed that of Boston, New York and San Francisco.
I plan on reviewing homebuilders over the next several weeks.