Home Building stocks are at an interesting point in 2014. It feels like they’ve been chopping sideways forever. And since 2007 they’ve been lagging the S&P-500.
See for yourself…
To further complicate the picture, the macro-economic and demographic headwinds seem at odds with the recent data coming out of individual home builders. Plus, home builders have been lingering for so many years, are they overdo to outperform?
Well, before jumping to any conclusions lets look at some facts…
Has the Housing Market Recovered in 2014?
There’s a lot of conflicting information about whether or not the home builder stocks have recovered. Just by looking at the graph above you can see they haven’t recaptured their prior highs.
There are a lot of interesting data points about the state of the American housing market and the American economy at large in 2014. They aren’t exactly encouraging…
- America’s Middle Class is No Longer the World’s Richest – If the middle class is getting squeezed, how can they afford to prop up housing prices… especially without low interest rates?
- Where Are All the Home Builders? Expanding on the idea above, Barry Ritzholt shares a nice graph showing that new home sales haven’t recovered since the recession – due to lack of household formation since the crisis and overbuilding during the boom years.
- The Housing Rollover is Wide and Deep – This articles gives an interesting look at how monetary policy has stifled the housing market.
- Why the 2014 Housing Market is Like 2007 – Read this article to see some incredible parallels in the housing market today, as compared to 2007. It’s hard to get excited about that… right?
So as you can see by clicking on the links above, there are some serious headwinds to the housing market in 2014. And these top down arguments aren’t easy to ignore.
To further obfuscate the state of a 2014 housing recovery, let’s look at some technicals.
Home Building Index (XHB) Stock Charts:
The intermediate term weekly chart is actually looking relatively constructive. The weekly RSI leaves a little something to be desired. But it could be carving out a bullish cup-and-handle pattern. Take a look
If we zoom in a little further, the picture is only complicated. XHB has failed to recapture recent highs. And while home building stocks have failed to get moving, with lagging RSI, they aren’t totally at risk of falling off a cliff either.
One of the other interesting charts worth watching is that of the materials ETF, XLB. It stands to reason that if housing input costs are rising – the margins of home building companies will come under pressure. As you can see, that might be a real concern…
But before getting overtly bearish on the market for housing stocks in 2014, let’s take a quick look at the results from some of the leading home builder companies in 2014.
PulteGroup and DR Horton both reported strong earnings last week. Both companies also had an increase in net new home sales compared to the same time last year. Were the disappointing housing data points in March really just the result of bad weather?
It’s hard to say. But the positive commentary from housing executives might offer room to be optimistic.
Housing market conditions remain favorable,” said Donald R. Horton, CEO of DR Horton. His counterpart at PulteGroup echoed this optimism. “We continue to believe housing is in the early stages of a multiyear recovery benefiting from low interest rates, low inventory and continued relative affordability of homes, and with consumers looking for well-located houses and displaying a clear willingness to invest in those features they value most,” said Richard J. Dugas.
And from the PHM quarterly report…
PulteGroup has gotten off to a strong start in 2014, with first quarter results showing gains resulting from our efforts to drive better pricing, operating margins and pretax earnings in support of higher returns on invested capital,” said Richard J. Dugas, Jr., PulteGroup Chairman, President and CEO. “Our first quarter gross margin of 23.8% is up 580 basis points over last year and 60 basis points over the prior quarter, marking our ninth consecutive quarter of gross margin expansion.”
Housing is a huge part of the economy. But for now I would say the jury is still out on the mysterious case of the home builders recovery in 2014. Stay tuned…
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