The latest homebuilders data reveals a housing market that’s in trouble as we approach 2015.
For example, last week the Commerce Department reported that housing starts fell in November, with homebuilders breaking ground at a seasonally adjusted annual rate of 1.028 million units.
That metric was down 1.6% in November vs. the prior month, and the key factor weighing down the figure was a 5.4% decline in new starts on single-family homes. The number of new building permits also saw a drop of 5.2% from the prior month.
On the plus side, we had October data that was revised higher to a seasonally adjusted 1.045 million from the initial report of 1.009 million. But for investors who own homebuilders, or who are looking to get long, individuals stocks and/or exchange-traded funds (ETFs) in the housing sector aren’t extremely attractive right now.
Homebuilders Underperforming
Of course, if you’ve been long homebuilders in 2014 via an ETF such as the SPDR S&P Homebuilders (ETF) (XHB), then you’re probably used to not getting what you want.
Year to date through Dec. 22, XHB has dolled out a miserly gain of just 1% or so. Meanwhile, the benchmark ETF for the wider domestic equity market, the SPDR S&P 500 ETF Trust (SPY), has delivered a 12% win.
At least this year, it wasn’t a case of home sweet home for investors who stuck with homebuilders.
Yet like the recent mixed data on the housing front, there’s also been mixed performance when it comes to stocks of the homebuilders. On the plus side there’s Lennar Corporation (LEN), +11% YTD, and D.R. Horton, Inc. (DHI), +12% YTD. But tthere are the high-profile losers among the homebuilders, including KB Home (KBH), -11% YTD; Toll Brothers Inc (TOL), -12% YTD, and Ryland Group Inc (RYL), -13%.
For investors who bet on the sector, it was definitely a case of location, location, location — as in finding the right homebuilders to move your money into.
2015 Outlook for Homebuilders
As for what’s in store in 2015, I suspect the outlook for the sector will continue to be mixed, and for several reasons.
First, have you tried to buy a home lately? If so, then you know the absolute herculean hassle it is, especially if you own a small business or you are someone who receives mainly 1099 income.
Despite the massive bailout that banks received from taxpayers some five years ago, those same banks are just not rushing in to help taxpayers trying to borrow enough money to purchase a little slice of the American dream. In fact, lending standards are more constricted now than they’ve been in decades, and until these standards loosen up a bit, homebuilders will continue facing a strict-lending headwind.
Another headwind facing homebuilders is the fact that the Fed is now done backstopping mortgages via the purchase of mortgage backed securities in QE3. Moreover, and despite Janet Yellen’s “patience” regarding the cost of capital, there is a strong likelihood that 2015 will be the year that interest rates finally start to go up.
Now, while I suspect the Fed won’t move to tighten rates too much in 2015, given a fickle and somewhat fragile housing recovery, anything that makes getting a loan less likely (and more costly) will almost certainly negatively affect homebuilders and home sales in 2015.
Then there is perhaps the biggest problem facing homebuilders, and that is the problem of demographics.
In an interview with CNBC, real estate expert David Berson of Nationwide Insurance explained this problem, saying, “What we’re really waiting for are millennials to start forming households. They haven’t yet. Many of them are still living with their parents. But as they get older, as they start to get married, as the jobs get better, they’re going to be a lot less interested in living in their parents’ basements, and a lot more interested in either owning a house or renting an apartment.”
This could be the biggest headwind facing homebuilders not only in 2015, but also in the years to come, and that’s because demographic trends such as millennials buying more homes tend to be very slow to develop. There’s also the fact that incomes in the US have basically remained static for the past several years, a truth that does not augur well for increased home buying activity.
While there were some solid winners among the homebuilders in 2014, the aforementioned headwinds of continued strict lending standards, higher mortgage interest rates and unfavorable demographics make me very wary of stocks in the sector going into 2015.
As of this writing, Jim Woods did not hold a position in any of the aforementioned securities.
