Don’t forget about homebuilders


This article is not a recommendation and is intended for educational purposes only.

A lot of things stood out in yesterday’s big rally, but let’s take a look at housing.

The iShares U.S. Home Construction Index (ITB) was the top major ETF on my RadarScreen, ripping 4.65 percent. That was its biggest gain since September 2013.

The move also came at a potentially pivotal time for the sector, which enjoyed a huge rally in the fourth quarter and an equally massive selloff in the first quarter. Here we are in the second quarter, with ITB trying to bounce at its 200-day moving average and all kinds of potential catalysts on the horizon.

After all, it’s hard to ignore stories about “rising home prices” and “shortages of available housing.” In the last two weeks alone, readers of business news encountered headlines like “Home prices are still on fire, Case-Shiller data show,”1 “Home prices go through the roof, defying forecast of tax-law hit,”2 or “U.S. Pending Home Sales Rebound More than Expected in February.”3

Click on those headlines, and you find further details about how the supply of new abodes is at a long-term low. You learn that owners have record equity in their residences and rents are still rising because would-be buyers can’t find affordable homes.4 Digging into mortgage-application data even shows borrowers a steady shift toward purchases and away from refinancing.5 But, at the same time, cash-out refis are at the highest level in a decade.6

iShares U.S. Home Construction Index (ITB)
iShares U.S. Home Construction Index (ITB), 6-month chart

Then you have earnings from the builders. Lennar (LEN), the biggest holding in ITB, beat estimates yesterday and raised its forecast for sales in 2018. That pretty much echoes the comments from others like Toll Brothers (TOL) on February 27 and D.R. Horton (DHI) in November.

Going forward, there’s a good chance attention will return to the sector. It’s also hard to see how sentiment will be anything but positive when you consider the broader backdrop.

Aside from the obvious seasonality of spring house-hunting, here are some events to watch:

  • April 16: NAHB’s homebuilder sentiment index
  • April 17: Housing starts & Building permits
  • April 24: PulteHome (PHM), the fourth-biggest stock in ITB, reports earnings. Masco (MAS), a key supplier of materials like cabinets, also reports.
  • April 26: DHI, the #2 company in ITB, reports earnings.
  • NVR (NVR), third biggest in ITB, has an estimated (not yet official) earnings date of April 19.

Bottom line: Homebuilders have pulled back following a surprise rally last year. Now they seem to have the winds at their back and a favorable calendar moving forward.

1. Marketwatch: 3/27/18
2. Marketwatch: 4/4/18
3. RTTNews: 3/28/18
4. CNBC: Homeowners are sitting on $5.4 trillion in ready cash, the most ever. 4/2/18. CNBC: Rents are rising at the fastest pace in almost two years. 3/22/18.
5. CNBC: Mortgage refinances fall even further despite first rate drop of 2018. 3/21/18.
6. Urban Institute: Housing Finance at a Glance. (March 2018 issue.)

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David Russell is VP of Market Intelligence at TradeStation Group. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.