It's been three months since I last addressed the homebuilders, and since the spring/summer housing season has begun, this is a good time to do so again.
When I last addressed the homebuilders in January, KB Home (KBH) and Lennar (LEN) had each just offered negative performance guidance for 2015.
Since then, both stocks are up substantially, by 33% and 10%, respectively. This is not what I expected.
In fact, I expected it to signal the beginning of a correction in all of the homebuilders. But just as KB and Lennar rebounded, so did the others.
In the last Toll Brothers (TOL) is up 14%, PulteGroup (PHM) is up 5.5%, DR Horton (DHI) is up 20%, Ryland Group (RYL) is up 31% and Beazer Homes USA (BZH) is up 8%. The only one with a relatively negative performance is Hovnanian Enterprises (HOV), which is almost exactly where it was three months ago.
These performances are way ahead of the S&P 500 during that period, which is up about 2.5%, while the SPDR S&P Homebuilders ETF (XHB) is up about 6.5%.
Interesting as well is that, on a longer-term basis, the homebuilders' performance as a group has tracked very closely that of the S&P for the past three months and one, two and five years.
The one-, two- and five-year performances for the XHB have been 15%, 21% and 88%, respectively; the S&P 500 has been 12%, 33% and 77%.
The five-year for the individual builders has been nowhere near as uniform, though, with greatly diverging patterns. In the negative camp, KB, Beazer and Hovnanian are down 15%, 44% and 52%, respectively, while Lennar, Toll, Pulte, DR Horton and Ryland are up 143%, 70%, 69%, 93% and 108%.
That's about as wide a pattern as there can be, suggesting that if you're going to be invested in the space, the XHB ETF is the most prudent course to take.
Coming back to the immediate, though, the builders' very positive performance of the past three months appears to be driven by investors' expectations for a strong housing season based on the same issues the Fed has been discussing with respect to expectations for increased economic activity.
This was evidenced well by CoreLogic about a month ago, in which it anticipated the strongest housing market since before the 2008 financial crisis, based on increasing economic activity, increased household formations, low mortgage rates and easing access to credit.
The National Association of Realtors offered a complimentary view of the potential for housing activity to increase in their release of a recent study of the return of the buyers who had lost homes to foreclosure or short sales in the post-2008 financial crisis with the headline "A Comeback Story: Return Buyers."
The release of that study was followed up yesterday by the news release, "NAR Study: Return Buyers Expected to Boost Housing Demand in Coming Years."
The Wall Street Journal looked at the study and supplied its own article on it, however, with the headline, "Many Who Lost Homes to Foreclosure in Last Decade Won't Return -- NAR," which says, "Fewer than one-third of families who lost homes are likely to become owners again, Realtor group finds."
The ability to look at the same data and draw diametrically opposed conclusions concerning the most salient points indicated or implied by it occurs on a regular basis with respect to economic reports and financial market potential.
There is an almost glass-half-empty/half-full perspective to this that is also evident in the seasonal performance of the homebuilders, with the builders and associated supplier stocks increasing in value during Q1 and Q2 of each year, in anticipation of a strong housing market, and then reversing once it becomes known that reality won't meet expectations.
The rough annual seasonal performance of XHB post-Lehman has been that these stocks move up on anticipation of a positive coming spring/summer seasonal during Q4 of the previous year and Q1 of the present year, move up to April 1, and then sell off during Q2/3 before starting the pattern over again.
This has been repeated every year for the six spring/summer seasons since Lehman failed, with the current one being the seventh.
The annual drift has taken the stocks to successive highs seemingly on expectations that each underwhelming season that passes sets up the next season to be better.
The same pattern looks likely for this year.
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