Homebuilder stocks are on a tear — and according to one analyst — that could be a good sign for the economy.
“More than anything else, the rally in homebuilders is not just about Big Tech’s 2023 U.S. equity rally. Other market baskets are also at work,” DataTrek Research founder Nicholas Collas wrote in a note to clients on Tuesday.
The SPDR S&P Homebuilder ETF (XHB), which focuses on the U.S. homebuilding industry, is up 28.2 percent for the year, outperforming the S&P 500 Index by 12.7 percent, according to research from DataTrek. It also closed at a new 52-week high on Tuesday.
“Could US recession really be around the corner if homebuilding stocks hit new highs today?” he asked. “The short answer to the above question is ‘No, it’s not clear.'”
Additionally, Kola said, homebuilding stocks “remain cheap for the market.”
For example, the average of the fund’s top 10 holdings, based on forward 12-month consensus EPS estimates, is 14.6x, compared to the S&P 500 at 18.6x, Collas noted. That includes homebuilders like Pultegroup ( PHM ) at 8.6x, Lennar ( LEN ) at 9.9x, DR Horton ( DHI ) at 12.2x, and NVR ( NVR ) at 15.6x.
One big reason for the optimism of homebuilders – and among them – is the limited housing supply, Kolas wrote, especially in the resale market. Homeowners were reluctant to sell their homes and exchange their low value on existing mortgages for double the value.
As a result, buyers frustrated by the lack of choice between pre-owned homes are flocking to the new home market. In May, new home sales rose 12.2 percent from April to a seasonally adjusted rate of 763,000 units, the government reported Tuesday. This is a 20 percent increase from a year ago.
Builders responded by accelerating their development plans. A strong housing starts publication in May showed new construction of both single and multifamily units jumped 21.7 percent to 1.631 million units on a seasonally adjusted annual basis.
Citigroup analysts led by Anthony Pettinari said in a note to clients on Monday that the current housing shortage “could create a multi-year tailwind for builders.”
Builders hinted at this mix of fortunes in their recent earnings call; They include constant demand for building materials, tight sales inventory and inflation to beat expectations and far-fetched views.
Cola echoed all of these benefits in the note, along with a slowdown in the Federal Reserve’s interest rate hikes.
“And, if the Fed is at the end of their current tightening cycle, interest rates should continue to decline in 2024 and beyond, supporting interest over the long term,” Colla wrote.
Danny Romero is a Yahoo Finance reporter. Follow her on Twitter. @daniromerotv
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