Boom or Bust for Home-Builder Stocks?

By September 2, 2013 Market Report No Comments

While home-builder stocks have made great strides in the past year, they have become volatile recently as investors deal with mixed economic housing data and rising mortgage rates. Investors have started to question the housing recovery and interest rates are putting pressure on home-builder stocks. But take a close look at the data, this just might be a great buying opportunity for investors if they can plan long-term and weather the “re-adjustment” period.

As you see, the National Association of Homebuilders (NAHB) reported that sentiment is up and confidence has risen to a seven-year high as the housing market makes a recovery, but the Dow Jones U.S. Home Construction Index is down. This is creating a huge gap between sentiment and performance. Homebuilders’ sentiment and home-builders’ stocks traditionally move in sync with one another. But that is not happening right now.

homebuilder sentiment vs home construction index

Homebuilders are enthusiastic. The latest reading of the National Association of Homebuilders (NAHB) sentiment index jumped to 59, its highest reading in almost eight years. Single-family home starts in July were up 15.4% over last year according to the U.S. Census Bureau and building permits were up 12.4% above July 2012. Building permits are traditionally viewed as a gauge for future demand. In fact, builders report they are seeing more and more motivated buyers according to NAHB chairman, Rick Judson.

single family home starts

With all this enthusiasm among homebuilders, you’d think investors would be feeling the same. However, investors are staying clear. Higher interest rates make mortgage loans more expensive, which in turn weakens the demand for new homes. This explains why new home sales in July dropped 13.4%. This is one of the main reasons why home-builder stocks have taken a plunge over the recent weeks. With this news, the outlook looks positive considering new home sales are still up 6.8% from a year ago. Despite concerns over the rising interest rates, the recent dip in home-builder stocks could be considered a good opportunity to tap into them now as homebuilders are geared for continued strong growth and momentum into 2014. Long-term trends in the home-building sector may be promising.

So who’s right, the investors or homebuilders? Are investors’ fears over real estate investments justified or do homebuilders know best? It will be interesting to see what happens. Comment and let us know what you think or contact us at 239-963-4811.

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