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Homebuilder Stocks Get Slight Recovery

Homebuilder stocks got slight recovery, but it isn’t much compared to 2018’s fall. The sector has taken a hard hit this year, and the headwinds just keep rolling in. The SPDR S&P Homebuilders ETF is down over 20 percent for the year, and individual names in the sector like Beazer Homes USA, Inc. and William Lyon Homes have lost more than half of their value.

Over the past year, the headwinds have been huge for homebuilders, even in a strong economy with high employment. In addition to Federal Reserve rate hikes driving Wall Street expectations down, tariffs on lumber have put a large amount of pressure on the sector.

According to the National Association of Homebuilders, tariffs on lumber have tacked on an additional $9,000 to the average cost of a single family home.

Moreover, the sector largely followed the run-up of the markets as a whole over 2016-2017, and hasn’t found much recovery since the February collection. Now, every piece of bad news is a major hit to the sector. Last month, Bank of America downgraded homebuilder stocks.

“This morning BofA Merrill Lynch’s US economics team lowered its 2018-2019 housing starts and new home sales forecasts and thus we slightly temper our macro housing assumptions,” analyst John Lovallo wrote in a note on October 18. The day prior, the Commerce Department reported that building permits had fallen 5.3 percent in September, higher than expected.

The latest hit for the sector came Thursday, following Federal Reserve Chairman Jerome Powell’s Wednesday comments. Powell reinforced expectations of a December rate hike, and more hikes in 2019.

The comments hit the sector hard, sending the SPDR S&P Homebuilders ETF down over 2 percent on Thursday.

Coinciding with Powell’s comments, sector powerhouse KB Home, cut its fourth quarter and 2019 guidance, sending the stock tumbling into it’s worst day of trading since 1992. Credit Suisse, Wells Fargo, Barclays and Wedbush all reactively cut their price targets for the stock.

The reason for the lowered guidance was ” an expected negative impact on our central region deliveries from the historic range experienced in Texas, fewer than anticipated spec sales and deliveries, and potential delayed closings over the next couple of weeks in California due to impacts from the recent large wildfires,” said CEO Jeff Mezger.

The good news is that, with one more day of trading last week, the sector had some time to recover. SPDR S&P Homebuilders ETF took back around 0.71 percent of its losses, and individual companies saw larger pops: Beazer Homes USA Inc. took back more than 5 percent, KB home rose by 7 percent, William Lyon Homes grained 3 percent, and PulteGroup Inc. Rose by 4 percent.

Is recovery likely to continue? It’s probably not, but the sector finding some resistance and a foothold for a slight recovery is good news in the current market. Eventually the rolling in of headwinds will subside, and the impact of falling lumber and oil prices, as well as wage correction, will get the sector back on track.