After many years of a sluggish recovery, the housing market has continued to strengthen and some analysts think 2017 could be the best year since the bottom fell out in 2007. If true, that could be good news for homebuilders and companies that provide products and services necessary for home construction. There are several macro factors that could benefit the housing market this year and help accelerate growth.
One of the biggest factors is jobs. Recent economic data continues to show signs of strength in the labor market. In February, the overall unemployment rate stood at 4.7% and wage growth has been growing at a faster pace than it has in the past.
In addition to a tightening labor market and accelerating wage growth, the University of Michigan’s Consumer Sentiment Index is close to 10-year highs and expectations that mortgage rates will continue to rise could motivate some potential homebuyers that may have been holding off. When it comes to existing homes the prices are high and the inventory is low. The combination of these factors could create a favorable environment for new homebuilders and the broader housing sector.
Will Homebuilders Benefit?
Lennar Corp. (LEN) reported Q1 earnings of $0.56 per share on March 21—slightly beating analyst expectations of $0.55 per share. New home orders were up 12% year-over-year on a unit basis. Lennar’s CEO, Stewart Miller, said “our homebuilding operations have gone from slow and steady to a faster than expected sales pace throughout our first quarter,” thanks to a combination of economic optimism, wage and job growth, and increasing consumer confidence.
D.R. Horton and PulteGroup (PHM) are expected to report Q2 earnings on April 20th. Both companies beat analyst’s revenue and earnings expectations last quarter. Looking at Figure 1 below, all three of the major U.S. homebuilders have outperformed the S&P 500 year-to-date.
There appears to be ongoing challenges facing these companies according to Robert Dietz, Chief Economist for the National Association of Home Builders, who said “builders continue to face a number of challenges, including rising material prices, higher mortgage rates, and shortages of lots and labor.”
Signs of a Stronger Recovery Ahead?
February housing starts for 1-unit structures, which measures the number of new, single-unit residential construction projects, were stronger than expected and hit 10-year highs (Figure 2). Single-family homebuilding surged 6.5% to 872,000 units. Single-family building permits in February increased 3.1% to 832,000, but overall housing permits declined 6.2% from January. Permits usually lead starts by a month so this could be an indication of holding off on starting new construction projects.
Existing home sales in February showed tight supply and rising prices while new home sales jumped 6.1% to 592,000 versus analyst expectations for 564,000. Stronger-than-expected new home sales combined with tight supply and rising home prices could be a positive sign for homebuilders. Strength in the housing sector is typically a good sign for the overall economy because of its impact on many industries including banking, materials, construction, and manufacturing.
Thinking Outside the Homebuilder Box
Homebuilders like Lennar (LEN), PulteGroup (PHM), and D.R. Horton (DHI) could benefit from a strengthening housing recovery. If you’re bullish on housing, you might want to take a step back and think about other companies in that space. Home improvement stores like Home Depot (HD) and Lowe’s (LOW) could get a boost as well as companies that supply products for new homes like Whirlpool (WHR) and USG Corp. (USG).
What’s Ahead for Housing?
We just saw a stream of housing data including housing starts, permits, and new home sales. It might be prudent to keep an eye on results from major homebuilders like D.R. Horton and PulteGroup that report in the second-half of April. After a run-up in price like there’s been with some housing-related companies, it’s a good idea to tread cautiously. When expectations are high, there can be more volatility if results disappoint.