Homebuilder stocks have performed well, reflecting attractive valuations and optimistic outlooks. However, two measures (besides high mortgage rates) diminish future prospects.
First, homebuilders’ own expectations
Yesterday’s NAHB/Wells Fargo Housing Market Index report showed continuing mediocre results in February for all three components:
- Present conditions = 52 – Up slightly from 2023’s 47 reading, but still far below the 80 to 90 readings in 2020, 2021 and 2022.
- Expected conditions for next six months = 60 – Up from 2023’s 48, but well below the previous three years’ 80 readings.
- Traffic of prospective buyers = 33 – Up from 2023’s 28, but below 2020’s 57, 2021’s 72, and 2022’s 65. (This component has lower results than the other two because the survey question formats are different.)
The traffic of prospective buyers is especially noteworthy because it directly ties to sales. After all, no traffic means no sales. The graph below shows all the monthly traffic readings from January 2020 through this February.
Second, new one-family houses for sale relative to sales
On average, homebuilders carry an inventory of about six-months sales. As the graph below shows, the monthly sales have seasonal swings. However, the inventory is fairly stable, generally rising and declining in line with the sales trends. (The for-sale inventory count is divided by six to allow for a direct comparison with monthly sales.)
What’s important about examining the monthly sales and for sale inventory relationship is to see if the two are in alignment. Too little inventory means a ramp up in homebuilding. Too much inventory means a cut back.
Homebuilders are especially watchful for an established uptrend in sales suddenly topping out and reversing. With the six-month inventory based on the good times, homebuilding must be cut back, perhaps sharply. The shaded circles in the graph show those times.
Then, there is today’s anomaly. After 2020’s surprising surge in new home buying, there has been a fairly steady downtrend in sales. However, look at the inventory. It’s now more than six months average sales. Moreover, after a minor adjustment down, it’s growing again. And yet, the survey results don’t reveal an optimistic outlook for a new uptrend ahead. Therefore, there is a big question mark about what lies ahead.
The bottom line: Anomalies mean caution
The items above might make selling or shorting homebuilder stocks seem like a good idea. However, homebuilders are savvy about their industry and its variabilities. Therefore, if they are building their inventories now, perhaps the survey results don’t capture the reasons for their optimism.
So, the best approach appears to be watchful, but inactive, waiting until the seasonal upswing arrives. Results at that time should provide the insight needed.