Homebuilders And Housing: Spring Selling Season Is Starting Up

Between low unemployment rates and strong consumer confidence, combined with record low interest rates, tight supply and high prices, the housing sector has benefitted from a variety of tailwinds in recent years. U.S. economic growth has accelerated in recent quarters and unemployment has held steady at 4.1%, two factors that have provided the sector with a positive economic backdrop.

A common concern has been rising interest rates putting a damper on housing affordability. The Fed has been hiking interest rates, with a quarter-point bump at this week’s FOMC meeting and projections for two more hikes in 2018. The average U.S. 30-year fixed mortgage rate rose 1 basis point to 4.45% this week, according to mortgage finance agency Freddie Mac. 30-year fixed mortgage rates have drifted higher from around a 3.5% average in late 2016, but they are still very low compared to historical rates.

Some analysts expressed concerns after larger-than-expected drops in February housing starts and monthly declines in existing-home sales and new sales. In the most recent reports, existing-home sales returned to growth and came in higher than analysts were expecting in February, although new home sales posted their third straight month of declines (see highlights below.)

Highlights from the February Existing-Home Sales Report

• Existing-home sales increased 3% to a seasonally adjusted rate of 5.54 million units in February, according to the National Association of Realtors (NAR).
• February sales were up 1.1% on a year-over-year basis.
• The median sales price increased 5.9% year-over-year to $241,700.
• There were 1.59 million existing homes on the market, down 8.1% compared to last year. At February’s sales pace, inventories would be exhausted in 3.4 months
• Properties for sale stayed on the market for 37 days in February and 46% of the homes sold were on the market for less than a month.

Highlights from February New-Home Sales Report

• Single-family home sales fell 0.6% month-over-month to a seasonally adjusted annualized rate of 618,000 in February, compared to analyst’s expectations of 620,000. January and December’s figures were both revised upwards.
• The median sales price increased 9.7% year-over-year to $326,800.
• The estimate of new houses for sale at the end of February was 305,000, the highest since March 2009. Based on current sales rates, there’s 5.9 months’ worth of supply. 

HOUSING SECTOR SINCE START OF 2017. The chart above shows the PHLX Housing Sector (HGX, orange line), compared to the S&P 500 (SPX, teal line) and the Dow Jones Industrial Average ($DJI, purple line). The PHLX Housing Sector is made up of companies whose primary  Year-to-date returns as a percentage are shown on the right hand side of the chart. Chart source: thinkorswim® by TD Ameritrade.  Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Builder Confidence Still High

Homebuilder sentiment hit an 18-year high in December, but it has dipped slightly over the past few months. The most recent reading from the National Association of Home Builders/Wells Fargo Housing Market Index came in at 70. Readings above 50 are considered positive sentiment.

“Builders’ optimism continues to be fueled by growing consumer demand for housing and confidence in the market,” said NAHB Chairman Randy Noel.

Despite the high sentiment, there are some challenges homebuilders have faced. Finding land to build on, rising labor costs and a shortage of workers, and increased costs of steel and lumber have been some of the headwinds commonly cited among the industry.

Potential Impact of Tax Reform

Two aspects of the recently passed tax reform were reducing the mortgage interest deduction from $1 million to $750,000 and putting a $10,000 cap on state and local tax deductions, limiting some of the tax advantages for homes above a certain value. Many analysts see this as a greater issue in housing markets in coastal states and urban areas, particularly for luxury condos.

For the most part, the changes aren’t expected to have a significant impact on the overall housing market. When luxury homebuilder Toll Brothers (TOL) reported earnings a month ago, management said they hadn’t seen a noticeable impact from the tax changes so far. Keep in mind too that this is just one aspect, albeit an important one, homebuyers are taking into consideration. On a broader level, unemployment remains low, consumer confidence is still high and record stock markets have helped boost U.S. household wealth.

Housing Sector During Earnings Season

Outside of major homebuilders like D.R. Horton inc DHR, Lennar Corporation LEN and Toll Brothers Inc TOL, there are a lot of other companies to consider following to see what’s going on in the housing sector. Home improvement retailers Home Depot Inc HD and Lowe’s Companies, Inc LOW, paint company Sherwin-Williams Co SHW and material manufacturer USG Corporation USG are just some of the many that are involved in different aspects of the market.