New home sales perked up in March following two disappointing months, jumping 13% year-over-year to a 571,000 annual rate, but the average selling price slipped nearly 5% despite tightening Federal Reserve interest rate policy. Long-term metrics suggest the industry will continue to grow for several more years because the homeownership rate has dropped to 63.8%, compared to a long-term average of 64.3%.

However, consumer confidence numbers have now fallen to the lowest level since the November election, with reduced optimism about U.S. jobs and economic growth. Higher interest rates. Rising health care expenses and geopolitical risk are forcing American consumers to think twice about taking on the debt required to own a new home, raising doubts about the longevity of the homebuilder’s rally.

D.R. Horton, Inc (DHI) beat EPS estimates by one cent in its quarterly confessional on Thursday morning while reporting a healthy 17.5% year-over-year revenue surge that beat expectations. The company holds the highest capitalization in the residential construction sector, so its results add a positive note to the debate about the group’s fortunes in 2017 and beyond. Even so, the stock fell nearly 3% after the opening bell, highlighting challenges that prospective shareholders should weigh before assuming sector risk.

DHI Long-Term Chart (1993–2017)

DHI

A rally into 1994 stalled at $4.43 and gave way to a 3-year sideways pattern, ahead of a 1997 breakout and trend advance that continued to post higher highs through 2000 to 2002 Dot-com bear market. The uptrend stalled in the second half of 2005 after the stock reached an all-time high at $42.82. It posted nine splits during that fruitful period, highlighting rapidly growing U.S. home ownership.

It turned lower into 2007, held down by chatter about the overheated real estate market and plunged in 2008, dropping to a 7-year low at $3.79 in November. The stock languished for the next two years, with buyers shell-shocked by the economic collapse, finally turned higher in 2011. That buying impulse stalled at the .618 Fibonacci selloff retracement level in 2013, yielding a pullback that found support in the upper teens.

A slow-motion recovery finally posted new highs in the second half of 2015, but the uptick stalled just above $33 at the .786 retracement level, while two subsequent tests at resistance failed to yield a breakout. It’s testing that level once again after earnings, requiring a high volume thrust above $36 to open the door to a long-awaited test at the 2005 all-time high in the low-40s.

DHI Short-Term Chart (2015–2017)

DHI

The 2015 breakout stalled at $33 in September, generating a late year test at that level, followed by a plunge into early 2016. The bounce through mid-year lifted price back to the big barrier, which failed to budge through the summer rally. The stock sold off into year’s end, posting a higher low in the mid-20s, and surged higher in a January Effect rally that reached resistance once again in March.

On Balance Volume (OBV) peaked ahead of price in 2015 and entered a distribution wave that’s continued to post lower highs into the second quarter of 2017, even though the stock has posted higher highs. This signals a bearish divergence that points to inadequate institutional sponsorship, with funds unwilling to place long-term bets on the homebuilding sector. A breakout above the red line in reaction to this week’s positive earnings report will generate an early buying signal that hits full strength when price mounts the blue rising highs trendline at $36.

The Bottom Line

D.R. Horton earnings are weighing on the homebuilding group, highlighting challenges due to rising interest rates and deteriorating consumer sentiment. Also, tighter U.S. immigration policy could trigger labor shortages in coming years, with the industry quietly utilizing millions of undocumented workers to control costs.

<Disclosure: the author held no positions in aforementioned stocks at the time of publication.>

Want to learn how to invest?

Get a free 10 week email series that will teach you how to start investing.

Delivered twice a week, straight to your inbox.