Homebuilding stocks and companies closely tied to the sector have beaten the market by a wide margin so far in 2019, but the outlook is bearish. Among the negatives are falling builder confidence, rising costs, labor shortages, trade tensions with China that may disrupt supplies of materials, and disappointing recent sales figures, according to a detailed story in The Wall Street Journal as outlined below.

The S&P Homebuilders Select Industry Index has surged by 28.5% for this year through July 10, outdistancing the 19.4% gain for S&P 500 Index (SPX), per S&P Dow Jones Indices. A leading ETF tracking the homebuilding index, the SPDR S&P Homebuilders ETF (XHB), is up by 29.7% based on adjusted closing price data from Yahoo Finance.

The table below summarizes key 2019 trends in homebuilding.

Key Takeaways

  • Homebuilding stocks have beaten the market handily so far in 2019.
  • These stocks include both pure builders and key suppliers.
  • Weak home sales in the spring suggest tougher times ahead.
  • Rising costs, labor shortages, and trade disruptions are other concerns.

Significance For Investors

The S&P Homebuilders Select Industry Index includes homebuilding and stocks in related fields such as homebuilding supplies and home appliances. The top three stocks by weight in both the index and the XHB ETF are, per State Street, the sponsor of SPDRs: appliance maker Whirlpool Corp. (WHR), up 35.3% YTD; home improvement retailer Lowe's Companies Inc. (LOW), up 12.7% YTD; and building technology company Johnson Controls International PLC (JCI), up 41.3% YTD. The only pure homebuilders among the 10 top components of the index and the ETF are: PulteGroup Inc. (PHM), up 26.6% YTD, and D.R. Horton Inc. (DHI), up 29.8% YTD. Homebuilding giant Lennar Corp. (LEN), which is 20th by weight in the index and the ETF, has soared by 22% this year.

The turn to dovishness by the Federal Reserve in recent months has bolstered the homebuilding industry as lower interest rates make the financing of home purchases more affordable. The average rate on 30-year mortgages has dropped to around 3.75%, the lowest in over 2 years.

Nonetheless, sales of new homes were down by 7.8% nationwide between April and May, while plummeting by almost 36% on the West Coast, per the Journal. In the market for new single family homes, housing starts dropped by more than 6% in May. On average, builders book about 40% of their revenue during the spring selling season, so these results point to yet more trouble ahead. “Expectations are going to be less and that will factor into perhaps lower revenue and lower earnings estimates,” said Kenneth Leon, global director of industry and equity research at research firm CFRA.

“The biggest difficulty of housing is those entry-level starter homes,” observes Buck Horne, a housing and real estate analyst at Raymond James Financial, as quoted in the same report. “We’re building about 200,000 houses under $250,000 a year. That number used to be 700,000,” he added.

Based on all these factors, homebuilders are not upbeat. Indeed, the monthly survey of builder confidence conducted by the National Association of Home Builders registered declining confidence from May to June, falling to a level below where it was at the same time in 2018, the report adds.

Looking Ahead

To make new single family homes more affordable, some builders are getting into the home rental business. “[Build-to-rent] only accounts for about 6% of total housing starts,” said Alex Pettee, president and director of research at investment advisory firm Hoya Capital Real Estate, per the Journal. “But you could easily see that go to 10 or 12% in the next five years.”