Homebuilder stocks have been out of favor for more than three years. Recently, however, the industry has regained investor attention, including the attention of the momentum crowd. Is homebuilder momentum doomed to fade away, as it happened last year?
We believe homebuilder momentum is for real this time around, for a number of reasons:
- First, macroeconomic fundamentals have been improving, especially job growth, the most important factor that determines housing affordability.
- Second, microeconomic fundamentals for the industry have been improving: New home inventories are declining; homebuilder confidence is improving; home prices are stabilizing; and industry leaders like Toll Brothers (TOL) have been reporting better than expected earnings results, Lennar, MDC Holdings (MDC), and DR Horton (DHI).
- Third, improving technicals. Trading volume has been improving across the industry, and some charts (e.g., Lennar's and Toll Brothers') look bullish.
- Fourth, large short positions that may fuel a short squeeze, once homebuilder stocks break certain technical thresholds (e.g., HOV, and MDC).
- Fifth, the housing industry is on the radar of every politician as we are heading into next year's elections.
- Sixth, a continuing environment of record low mortgage rates. But which homebuilder stocks offer the best appreciation potential?
Conservative investors may want to bypass this question by buying an ETF investing in homebuilder stocks like SPDR Homebuilders (XHB) and iShares Dow Jones Home Builders (ITB), or buy the shares of diverse homebuilders like D.R. Horton, MDC holdings, and Ryland Group (RYL). Aggressive investors may want to accumulate the shares of individual homebuilders that have been taking steps to address the housing crisis early, like Lennar Corporation (LEN), Toll Brothers, Standard Pacific (SPF), and Honvanian Enterprise (HOV), though due diligence is recommended.