Homebuilding Stocks, Funds Are In Play
June U.S. home sales rose by 0.8 percent in June, and home values have rocketed upward by 7 percent on a year-to-year basis, according to data from Zillow.com, continuing to propel homebuilder stocks and funds upward.
The National Association of Home Builders is bullish on the U.S. housing market, citing a lower mortgage interest rate environment, a more robust jobs climate and stronger consumer sentiment, but with a few caveats.
"The overall index is running above 100 percent of normal largely due to healthy home price appreciation," says NAHB chief economist Robert Dietz. "At the same time, the reason why single-family permits are barely halfway above normal is because builders continue to face persistent supply-side headwinds, including rising material prices and a shortage of buildable lots and skilled labor."
[See: The New Sector Funds: 10 Thematic ETFs.]
Other homebuilding experts agree, especially on the inventory issue.
"Purchase transactions are strong, mostly due to a shortage of inventories," says Daniel Milstein, chief executive officer at Goldstar Mortgage. "There just aren't a lot of homes to buy right now. It's pretty thin out there."
That might be changing as new construction numbers are up, which is a scenario that could also help boost homebuilder stocks.
"Overall, housing starts jumped 8.3 percent in June -- 1.215 million versus an expected 1.16 million," says Marc Carver, owner of the Carver Property Group, with offices in Atlanta and New York.
Carver says single family housing starts jumped 6.3 percent in June, and are up 8 percent on a year-to-date basis.
"That's making up for the decrease in activity in prior months, mainly due to some extenuating, seasonal circumstances," he says. "Starts are back in line with forecasted activity, due to increased builder confidence and the limitations of existing supply."
Low interest rates are also helping push the real estate market, and homebuilding stocks and funds in the process.
"The biggest factor influencing the outlook for home building stocks is the low interest rate environment," says Robert Johnson, president and CEO of the American College of Financial Services. "According to the CME FedWatch tool, the consensus of the market is that there is only about a 50 percent chance that the Fed will raise interest rates by 25 basis points through the end of the year."
This influences homebuilding stocks in two important ways:
"A low interest rate environment encourages people to borrow and buy that home of their dreams," Johnson says. "Low interest rates mean lower mortgage payments and buying a home becomes more attractive."
Low interest rates mean that the broader stock market looks attractive in relation to bonds, Johnson adds.
[See: 10 Skills the Best Investors Have.]
"As bond yields get higher, bonds get more attractive and stocks become less attractive," he says. "So, low interest rates not only influence the demand for homes, but also low interest rates are good for valuations of all equity securities. Those of homebuilders included."
All of the above factors have some money managers adopting a bullish mindset on the housing and homebuilding sector.
"We have a positive outlook on housing demand and housing-related stocks because our companies continue to report higher traffic trends and growing order counts," says Jay McCanless, senior vice president at Los Angeles-based Wedbush Securities.
McCanless, who covers the homebuilding sector for Wedbush, says mortgage rates remain near historical lows, which is helping with affordability.
"Thus, we anticipate housing-related names should trade higher from current levels as demand indicators are positive," he says. "Plus, rental rates have been climbing along with housing prices so ownership, in some cases, may make better financial sense than renting."
It's not all positive news for homebuilders, though.
"Input costs (like land, labor, and materials) are rising and regulatory burdens from local municipalities appear to be an emerging headwind," McCanless says. "But positive factors are pricing power for most builders as well as the aforementioned demand trends."
Wedbush favors a handful of homebuilding companies, with two in particular.
"In larger cap names, we favor D.R. Horton (NYSE: DHI)," he says. "The company has met or exceeded guidance for several quarters now, and about half of DHI's business is entry-level, affordable product, which seems to be in the sweet spot for demand. In smaller-cap names we favor Century Communities ( CCS). Similar to DHI, about half of CCS's business comes from entry-level, affordable product which we estimate is the highest demand sector in homebuilding."
Homebuilding ETFs are also booming in 2017. The benchmark iShares US Home Construction ETF ( ITB) is up 23.75 percent on a year to date basis, while the SPDR Homebuilders ETF ( XHB) is up 14.89 percent.
[See: 7 ETFs for a Solid Portfolio Defense.]
Both funds hold benchmark homebuilding industry stocks like Lennar Corp. ( LEN), D.R. Horton, Home Depot ( HD), and Lowe's Companies ( LOW).
More From US News & World Report
