ContributorsPublishersAdvertisers

These home builder stocks are a sell as inflation concerns trump upbeat housing fundamentals

MarketWatch
MarketWatch
 2022-01-20
https://img.particlenews.com/image.php?url=20DjP9_0dq5FTUo00
Construction workers are seen outside a new house being built in Monterey Park, California on March 19, 2019. - The Los Angeles metro area is one of the worst areas in the country for first-time home buyers, according to a study released by Bankrate.com, which analyzed the 50 largest metropolitan areas in the country with Los Angeles finishing behind San Francisco as the worst for first-time home buyers. (Photo by Frederic J. BROWN / AFP) (Photo credit should read FREDERIC J. BROWN/AFP via Getty Images) By AFP via Getty Images
THE RATINGS GAME https://img.particlenews.com/image.php?url=1QWQA6_0dq5FTUo00

Shares of home builders fell Wednesday, despite upbeat new-home construction data, after KeyBanc Capital analyst Kenneth Zener recommended investors sell a number of names, basically because of history and math.

Zener said historical performance of home builder stocks suggests inflation concerns, and subsequent interest rate increases by the Federal Reserve, are a “negative factor, superseding fundamentals considerations, in a highly repetitive fashion.”

Earlier Wednesday, data from the U.S. Census Bureau showed that U.S. home builders started construction of new homes at a seasonally adjusted annual rate of 1.7 million in December, up 1% from the previous month, compared with expectations for a decline to 1.65 million. And permits for new-home construction rose 9% from November to a seasonally adjusted rate of 1.87 million, well above expectations of 1.71 million.

Despite the strong data, shares of Lennar Corp. (LEN) fell 4.4% to $96.86, KB Home (KBH) dropped 3.9% to $43.42 and Toll Brothers Inc. (TOL) slid 4.7% to $60.35. That’s because KeyBanc’s Zener downgraded all three companies to underweight from sector weight.

He also downgraded D.R. Horton Inc. (DHI) to sector weight from overweight, and the stock slumped 3.3% to $90.33.

The SPDR S&P Homebuilders exchange-traded fund (XHB) fell 1.9% to $75.21, and has declined 128% since it closed at a record $86.27 on Dec. 10, while the S&P 500 index (SPX) has lost 3.8% over the same time.

Zener explains that since 1969, there have been 19 interest-rate tightening cycles, and home builder stocks have declined 89% of the time, with an average aggregate drop of 32% from peak to trough. The sector declined 12% the first three months after the first rate hike, and fell 21% from the first hike to the last.

And with current inflation running at the fastest clip in nearly four decades , the Fed is widely expected to start raising interest rates in March .

Basically, rising rates not only makes buying a house more expensive, they can also reduce liquidity in the financial system, making less money available for mortgages.

The overall impact of rate-hike cycles has been an average 8% drop in the home-buying affordability index, Zener said.

Zener’s downgrades come before the first rate hike, because he argues that home builders are “early cycle,” which suggests they peak before the start and bottom before the end of the cycle. And to Zener, “early means not waiting to find out if fundamental considerations are valid in the future.”

Meanwhile, “early cycle” also means a time to start buying the builders again can also be deduced.

Zener said rate-hike cycles have lasted 10 months on average, and his analysis shows that “buying the builders ~75% through the tightening
cycle is best.”

If the Fed does start raising rates at the March 15-March 16 policy setting meeting , that would imply sometime in late-October or early-November would be the “best” time for builder stocks.

Comments / 0

Comments / 0