What To Do With Homebuilders Stocks

After a stellar 2017, the homebuilder sector is off to an inauspicious start in 2018.

The major homebuilder ETFs are all down between 7 to 11 percent year-to-date, and two of the major homebuilder stocks—D.R. Horton Inc DHI and NVR, Inc. NVR are down about 10 percent; a third, Lennar Corporation LEN, is only down 4 percent after a post-earnings jump.

This price breakdown coincides with economic data that doesn’t exactly scream positivity for the sector.

Both new home sales and the National Association of Home Builders’ sentiment index, two key indicators watched very closely, fell for the third straight month in February. Building permits have also declined on a month-over-month basis. But in the grand scheme of things, this pullback could represent a buying opportunity for traders.

The argument for the sector’s momentum to continue through 2018 is founded on some extremely strong market trends. Home sales in 2017 were the best they’ve been in over a decade. D. R. Horton, NVR, and Lennar—both top-ten holdings of the Direxion Daily Homebuilders & Supplies Bull 3X Shares ETF NAIL—had their most profitable year ever. The Dow Jones U.S. Select Home Construction Index is still up 23 percent on a year-over-year basis, and optimism is high that these trends will continue through 2018.

The largest and most looming issue confronting the sector is on the supply side. The majority of those surveyed by the NAHB singled out diminishing supply of new homes as their main cause for concern, followed by the recently ratified changes to the nation’s tax code.

This scarcity has been a trend through a chunk of 2017, but it’s starting to negatively affect prices. Lawrence Yun, the NAR’s Chief Economist, pointed to the thin supply and high prices in the housing market as driving reasons confidence among prospective homebuyers has weakened between 2017 and 2018.

Of course for investors, it all comes down to whether or not these trends impact revenue. So far, that has not been the case.

Five of NAIL’s top six holdings—D.R. Horton, Lennar, PulteGroup, Inc. PGE, Toll Brothers Inc TOL, and Home Depot Inc HD — had record sales in 2017. Plus, Lennar’s Q1 report came in above analyst estimates, continuing that trend.

There’s also the chance that the dip in homebuilders is merely a correction to the red hot buying action that occurred at the end of 2017. If that ends up being the case, look for equities in the sector—especially leveraged ETFs like NAIL—to rip.