The Global Pandemic is Changing the Housing Industry – Homebuilders Win

Different industries have been affected in different ways as a result of the global health crisis associated with the COVID-19 virus. Some of the effects have made a lot of sense—airlines and lodging companies got hurt badly as people were ordered to stay home, while companies like Zoom and Amazon have benefitted because their services help people stay home.

There is one industry that appears to be benefitting that I was completely surprised by and that is the housing industry. Yes, new home sales have fallen since January, but they haven’t fallen nearly as much as analysts were predicting and rose on a month over month basis in April.

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If we look at the long-term chart of new home sales we see how the indicator has been trending higher since hitting a low in 2011. The trend is clearly to the upside and yet it’s nowhere near the high we saw in 2005. In fact, the current annualized rate is not even half as high as the 1.389 million rate we saw that year.

Not only are new home sales trending in the right direction, but I think the pandemic is helping and will help going forward. I have three different theories on why that is. First, I think people are reevaluating their current living arrangements. People in very densely populated cities like New York, Chicago, Miami, etc that have sought apartments in high-rise buildings with thousands of other people are now thinking about living in the suburbs in single-family homes.

Secondly, because people are working from home and their kids and spouses are at home, I think they are looking at how small their home may be. Sure it’s fine when you are only there at night and on the weekends, but when you are all there all the time, perhaps it isn’t as big as it seemed. I know on a personal level, we aren’t looking to move, but I have also been on business calls where I had to explain the noise coming from the next room was my 15-year old son playing his trombone because he was in a virtual band class.

The third thing that I think is helping is the shift to more remote work being allowed. A number of major companies have announced that the remote working arrangements that were temporarily put in place as a result of the virus will be made permanent. This will allow people to live farther from the office and in places like Silicon Valley people will seek more affordable locations.

If we look at some of the major homebuilder stocks, the companies score extremely well in two fundamental ratings that I use extensively. I rely heavily on the EPS rating and SMR ratings from Investor’s Business Daily. The EPS rating measures a company’s earnings growth over the last few years with a heavier weighting on the most recent quarters. The rating is then measured against all other companies in IBD’s database with 99 being the best score and 1 being the worst score. The SMR rating measures a company’s sales growth, profit margin, and return on equity. The best score a company can get is an A and the worst score is an E.

The five companies above are five of the largest homebuilders out there in terms of market cap. In fact the order the stocks are listed in the table is based on the market cap. As you can see, all five companies score a 95 or better in the EPS rating system and two of the five get A’s in the SMR category while the other three all get B’s. That’s a pretty good report card. I should mention that I use the EPS ratings and the SMR ratings as a quick reference and if I see other factors I like, I dig deeper in to the fundamentals.

Looking at a weekly chart of the SPDR S&P Homebuilders ETF (NYSE: XHB), now may not be the right time to buy the homebuilder stocks. I looked at the individual charts of the five stocks listed above and most of them are very similar to the chart below. They have made huge bounces off the March low and they are overbought based on the weekly stochastic indicators.

The 10-week RSI isn’t in overbought territory yet and it seems to be a bigger concern when it hits overbought territory than when the stochastics hit overbought territory.

I don’t think investors need to wait until the RSI falls to oversold territory, or the stochastics for that matter, but I think a little dip like the two we saw in 2019 could be a buying opportunity.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.

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