Earlier this month, we provided an overview of the housing sector because it’s such a key indicator for gauging the relative health of consumers. If housing prices are rising, the consumer is probably doing relatively well, which is good for the U.S. economy.
However, much of that depends on rising wages, prices, interest rates and confidence. At the time, we believed that housing stocks were in a somewhat balanced position pending new information.
Over the last two weeks, more economic data for the housing market has been released. Existing home sales, housing starts, building permits and builder confidence have all been slightly better than expected. The trend seems to be improving and, with the exception of today’s pending home sales report, the industry seems to be on the verge of a positive breakout again.
The unanswered question is whether the recent round of positive economic reports is merely a reflection of future demand that has been pushed forward into the present because consumers are trying to get ahead of the Fed’s interest-rate plans.
We have seen this issue before with gun sales after the last Presidential election and the “Cash for Clunkers” program in 2009. We believe this is becoming a less-likely scenario, but it’s still an important factor to watch in light of the Fed’s report this week.
Another issue that doesn’t show up in the headline number for most housing reports is the average price paid for new or existing homes. Sales numbers can go up temporarily when prices go down (or at least grow at a slower-than-expected rate). The S&P Case-Shiller home price index was released on Tuesday, showing a slower-than-expected growth rate — the 4.9% year-over-year growth in the 20-city index came in below an economist consensus estimate of 5.7%.
On the surface, this seems like a bad sign. However, we think it warrants a closer look through the recent earnings reports in the sector.
For example, Tuesday’s DR Horton (DHI) report showed that profits were up and demand was very strong, but much of its success was being driven by entry-level or “starter” homes. From an industry perspective, growth in the low-end is the best kind of progress, because while that may lower the average price, it indicates growth in the largest market segment.
Wednesday’s Federal Open Market Committee report seems to reflect a similar view as well. The FOMC sees risks to the general economy as “balanced,” but it was positive about improvements in housing and employment. The committee didn’t raise rates and didn’t make its tone much more hawkish for a rate hike in September. At this point, it seems likely that the interest-rate environment will be accommodative for housing.
In light of the FOMC’s tone in this week’s announcement, we believe that the housing sector is still likely to outperform the market on a relative basis. Trends are positive, the early quarterly reports have been a net-surprise and margin pressure has eased.
This is a minor reversal from our position mid-month, but the data seem to justify a more positive outlook.
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