The fundamentals for housing look strong. Mortgage rates are still near record lows while hiring is expected to be strong for an extended period. That could provide another run for top names such as building giant Lennar (LEN,) RH (RH), Home Depot (HD) and Trex (TREX) in buy zones.
For more than a year, housing stocks boomed thanks to record-low borrowing rates while renovations also took off as people set up home offices or spruced up their surroundings during lockdown.
However, housing-related stocks have slumped in recent weeks. As the economy reopens, consumers may be shifting their spending to entertainment and travel.
High prices and tight inventory are also weighing on the market. Sales of new single‐family houses fell nearly 6% in May to a seasonally adjusted 769,000 units vs. April. Existing-home sales in May slipped almost 1% from April to an annualized rate of 5.80 million.
National Association of Realtors Chief Economist Lawrence Yun says that although sales are beginning to slow down, he’s not overly concerned.
“Sales last year went way above the pre-pandemic level,” he told IBD. “Now it’s trending back down towards pre-pandemic sales activity. All the while, prices have risen at a tremendous rate. Median prices are up more than 20% from a year ago, implying there are still plenty of buyers in the marketplace.”
Meanwhile, lumber prices have plunged after soaring for months. But while lower lumber costs could improve margins for homebuilders, those savings could be offset by labor shortages and higher wages.
If people return to work en masse, inflation stays in check, and mortgage rates remain low, stocks with exposure to the housing market — such as builders, suppliers and furniture chains — could rebound from a recent slide.
Wedbush analyst Jay McCanless predicts the housing market is “going to have longer legs than people expect.”
Housing Stocks Reset
Following the latest ups and downs, some housing stocks have started to recover enough to form new bases and buy points.
Lennar stock is consolidating with a 110.71 entry, though shares remain just below their 50-day line, according to MarketSmith chart analysis.
Decking and fencing maker Trex is also consolidating with a 111.14 buy point and is back above its 50-day line.
And luxury furniture chain RH is in a cup-with-handle base with a 719.87 buy point and has bounced from its 50-day line.
Crosscurrents In Housing Market
As mortgage rates tick up from record lows, some homebuyers could be squeezed out of the buying frenzy. The average 30-year fixed mortgage sits at 3.3% as of June 29, according to BankRate.com.
“We anticipate the mortgage rate will be rising to 3.5% by the end of this year,” Yun said. “And we think home sales will be below pre-pandemic levels by the fourth quarter of this year. But prices are in no danger of a decline.”
As a result, homebuilders that make more-affordable homes could attract cost-conscious buyers. Yun says first-time buyers with limited funds could boost demand for more moderately priced homes farther away from urban centers.
Meanwhile, the futures price of lumber has been on a wild ride. After soaring more than fivefold from March 2020 levels to peak at $1,670.50 in May, they are now nearly half that.
McCanless said most builders he’s surveyed are not planning to adjust home prices as they come down. “Any benefit in lumber prices coming down we’ll probably see in gross margins in the third and fourth calendar quarter.”
As a result, Lennar is strategically selling its homes later in the production cycle, co-CEO Richard Beckwitt said in a June 17 earnings call.
Selling them earlier means the company would “lose your ability to offset potential pricing cost increases with sales price increases.”
Still, Lennar noted land and labor availability remains tight while supply-chain snarls persist. But the company has used new scheduling and forecasting tools to optimize labor.
And rival housing stock KB Home (KBH) locks in material and labor costs at the time each home starts to mitigate cost inflation during the construction process.
High-Speed Boost For Housing Stocks
All indications are that most workers are in no hurry to return to the office full-time. Many businesses are offering flexible, hybrid work scenarios too. Therefore, people will continue to either upgrade home workspaces or buy homes in which they can comfortably work.
“People have realized that you can do a lot more out of your house,” McCanless said.
He adds that homebuilders will continue to expand into smaller metro areas like Knoxville, Tenn., and Des Moines, Iowa, which have seen more job and population growth than expected. Sales of second or vacation homes are also on the rise, adding momentum to home sales overall, McCanless said.
What’s more, the federal and local government push to expand high-speed internet to rural areas could be a boon for housing stocks, especially builders that make more-affordable homes, he added.
Last fall, the Federal Communications Commission launched the first phase of its Rural Digital Opportunity Fund auction. That will provide internet companies with $20 billion in subsidies over the next decade to build out broadband networks in underserved parts of the country.
The funding will connect roughly 10 million Americans who don’t have any internet access or are on slow speeds.
“If that program expands, the builders are going to follow,” McCanless said.
Follow Adelia Cellini Linecker on Twitter @IBD_Adelia.
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