Shares of home builders battered during 2018 have soared so far this year, an optimistic sign for the U.S. economy amid fresh worries over a stagnant housing market and slowing global growth.
Although housing data remain decidedly mixed, the National Association of Home Builders’ housing-market index showed home-builder confidence rebounded this month. It was helped by a gradual decline in mortgage rates, along with strong employment growth.
Labor shortages, weak economic data and affordability concerns in the housing market had sent home-builder sentiment to its lowest point in more than three years in December, according to the NAHB.
The renewed optimism has lifted home-builder shares this month. Beazer Homes USA Inc. (BZH) has surged 24%, and Lennar Corp. (LEN) and D.R. Horton Inc. (DHI) have rallied 15% and 11%, respectively. Meanwhile, Toll Brothers Inc. (TOL) has gained 7.6%.
All four stocks are still down at least 26% over the past 12 months. In comparison, the S&P 500 (.SPX) is up 5.4% in 2019 but off 6.9% over the past year.
The decline in mortgage rates could help boost demand for builders, some economists have said. The rate for a 30-year fixed-rate mortgage was 4.45% this week, hovering around a nine-month low and down from nearly 5% about two months ago, according to mortgage-finance giant Freddie Mac (FMCC).
“The big issue on the demand side is housing affordability,” said Robert Dietz, chief economist at the NAHB. “We’re getting a little bit of a reprieve here with the decline in interest rates to start the year, but the expectation is that the general trend in rates will be upward in 2019.”
Other recent data also suggest the housing market could be in for more turbulence this year. Home sales tumbled in December to their weakest level since 2015, the National Association of Realtors said Tuesday. That was partly due to high home prices and a lack of starter homes in major metropolitan markets.
Jeffrey Powell, managing partner and chief investment officer at Polaris Greystone Financial Group, which has about $1.7 billion in assets under management, said his firm has added exposure to beaten-down home-builder stocks this month in light of their cheaper valuations and lower mortgage rates.
But he cautioned the rally for home builders could be short lived.
“This looks more like a trade rather than a long-term investment,” Mr. Powell said. “If we’re still in these things three months from now, I’ll be surprised because rates are going to normalize at some point.”
The yield on the benchmark 10-year U.S. Treasury note, a barometer for mortgage rates, fell to 2.714% Thursday, but has climbed in 10 of the past 14 trading sessions. That is still well below November’s seven-year high of 3.232% as the Federal Reserve has scaled back its interest-rate projections amid fears over slowing global growth. Yields rise as bond prices fall.
Chris Zaccarelli, chief investment officer at Independent Advisor Alliance, which has about $3 billion in assets under management, said his firm has been buying shares of home-improvement companies, instead of home builders, over the past month on expectations that the builder’s recent relief rally is temporary.
Shares of home-improvement retailer Home Depot Inc. (HD) have edged up 3.2% this month, while Lowe’s Co. (LOW). has slipped 0.6%. Both are down about 14% over the past 12 months.
“Your best risk reward is to play both sides of the coin: either people will stay in their homes, or they will continue to build houses,” Mr. Zaccarelli said, adding that it is difficult to know where things are headed in the absence of new-home sales data due to the government shutdown. “If we see a breakout in the economic data one way or another, then we’ll know whether or not it makes sense to get back into home-builder shares.”
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