In beating back a growing chorus of hawks at the FOMC on Tuesday, Federal Reserve Chair Janet Yellen sent one succinct message to investors: Buy housing stocks ahead of the peak spring/summer buying season.
In her speech yesterday at the Economic Club of New York, Yellen made it very clear that, once again, she is a champion of spurring the U.S. economy through rock-bottom rates. Can you blame her for tossing cold water on the recent improvement in the labor market? Look what happened to the global equity markets following the Fed's first post-Great Recession rate hike late last year.
Yellen is going to do everything in her power to keep the FOMC hawks at bay, and put off rate hikes for as long as possible in order to prevent an economic meltdown from occurring on her watch. After all, the next president may give her the boot...
What Yellen is fostering with her disciplined approach to rate increases is the continued comeback in the U.S. housing market. And the market has started to sniff this out -- the SPDR S&P Homebuilders ETF (XHB) has tacked on almost 6% in the past month compared to a 3.4% gain for the S&P 500. What makes this even more of an interesting move higher for homebuilders is that influential Fed members such as John Williams and James Bullard have recently come out in support of picking up the pace of rate increases.
Homebuilders are falling into favor among investors again
Source: Yahoo Finance
Adding gas to the budding flame in homebuilder stocks are several data points.
Lennar (LEN): The Miami-based homebuilder crushed February-quarter earnings expectations by $0.11 per share last Friday. Deliveries rose 12%, and the average selling price surged 26%. Backlog advanced 13%. "Even while the month of December was defined by the first interest rate hike by the Fed since the great recession, which turned into capital market turbulence and fears of recession as we entered calendar 2016, we have seen only mild negative impacts to our business and have continued to be able to perform as expected," said Lennar CEO Stuart Miller on an earnings call. Consumers continuing to buy homes despite higher rates is a nice sign of the pent-up demand that exists. Now that rates are unlikely to rise until later in the year, there is no reason that this pent-up demand shouldn't be released -- strongly -- this spring/summer.
Pending home sales index: The index spiked 3.5% in February to 109.1, the highest level seen in seven months.
New home sales: Sales rose 2% in February to 512,000, beating forecasts for 510,000. But sales continue to be held back by tight inventories, which I suspect major homebuilders such as Lennar, KB Home (KBH) and Toll Brothers (TOL) will seek to address in coming months (and do it at higher selling prices to consumers) as they seek to feed the appetite of people looking to lock in low rates.