DHI Stock: Housing Stocks’ Rally Hits Critical Mass for D.R. Horton

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The rally in housing stocks has been a much needed respite from the global economic data storm, as housing stocks represent a critical barometer for the domestic economy.

DHI Stock: Housing Stocks' Rally Hits Critical Mass for D.R. Horton

So far, the indications are quite optimistic. As of this writing, shares of D.R. Horton (DHI) are up 17% year-to-date, with 11% of those gains coming in over the past month.

According to an Aug. 18 report by the U.S. Department of Commerce, July’s growth rate for housing starts (the breaking of new ground for home construction) reached a velocity similar to levels witnessed just prior to the financial crisis.

A day prior, the National Association of Home Builders released its homebuilder sentiment index, which was at its highest level in nearly a decade. The combined optimism buoyed several housing stocks in the first half of the prior week, including D.R. Horton, which jumped to a 3.2% lead on Aug. 19.

But given the broad selloff in the Dow Jones, this could be a classic case of too much, too soon.

The Raging Bull is Finished with D.R. Horton

In the years leading up to the sub-prime mortgage crisis of 2006 and the financial markets meltdown of 2008, DHI rapidly outpaced the growth rate of new home sales across the U.S. Between 1994 and 2006, the month-over-month sales rate of newly constructed homes averaged a modest 0.48%. In contrast, DHI stock averaged 2.5% using the same metric.

However, when the sentiment in both equity and real estate markets began to fissure, D.R. Horton shares dropped in line with the freefall in new home sales. From January of 2006 until the end of 2008, DHI stock went deep in the red for a monthly average loss of 3.28%. Figures for home sales growth reached a near-identical correlation at an average loss of 3.11%.

Post-financial crisis, D.R. Horton stock and the real estate market have gone on divergent trends. Since January of 2010, DHI stock’s monthly performance averages 2.14%, while new home sales — though significantly improved over prior years — remains comparatively lethargic at 0.73%. In nominal terms, this equates to approximately 386,000 new homes being sold every month, but between 1993 and 2008, this figure was nearly 900,000.

DHI stock, real estate, markets
Source: Source: JYE Financial, unless otherwise indicated

The vast difference in magnitude means that, despite the current collapse in faith in the market, DHI stock is trading within 20% of its all-time high on an adjusted basis, while current new housing sales are well below its own record of 1.4 million units, set in July of 2005.

Worse yet, D.R. Horton has generally risen higher in speculative value as the underlying economy arguably gets weaker. So far this year, DHI stock’s monthly average growth rate (discounting the selloff over the past three days) is 3.16%, whereas new home sales were actually in the negative with a loss of 0.21% per month.

The benchmark S&P 500 — though on the right side of the fence — was lumbering along at a very modest 0.26% before the selloff on Friday and Monday. Adding to the combustible mix is the possibility of an interest rate hike by the U.S. Federal Reserve, which could potentially slow real estate transactions across the board.

D.R. Horton shareholders presently enjoy an envious status as market leaders, but soft industry fundamentals threaten to knock DHI off its perch.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

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A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. Tweet him at @EnomotoMedia.


Article printed from InvestorPlace Media, https://investorplace.com/2015/08/dhi-stock-d-r-horton-dhi-housing-stocks/.

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