Stocks in home building companies are up sharply this year, outpacing the S&P 500 Index (SPX), the Wall Street Journal reports. For the year to date through Wednesday’s close, shares of KB Home (KBH) are up 32% ($15.77 to $20.82), Lennar Corp. (LEN) is up 17% ($42.86 to $50.27), Toll Brothers Inc. (TOL) gained 19% ($30.93 to $36.84), and D.R. Horton Inc. (DHI) rose 21% ($27.15 to $32.86). The price-earnings (P/E) ratios on these stocks are 18, 15, 17 and 13, respectively, per Investopedia data. By comparison, the S&P 500 has advanced by 5.3% (2,238.83 to 2,357.03) over the same period. (For more, see also: Homebuilder Stocks: What’s the Best One?)
On Monday, the National Association of Home Builders/Wells Fargo showed confidence among home builders at its second-highest level since 2005, according to the Journal. Home sales figures in the first quarter were the best since the same quarter of 2007, per the National Association of Realtors, as reported by the Journal. Census Bureau data shows the percentage of first-time home buyers increasing towards its long-term average, and online real estate listings company Trulia finds that new households are more often seeking to buy homes than rent them, per the Journal.
Boost for Building Supply Stores
These trends are also positives for building supply and home improvement retailers such as The Home Depot Inc. (HD) and Lowe’s Companies Inc. (LOW). On Tuesday, Home Depot announced first quarter earnings per share of $1.67 that were about 5% above the same period in 2016 and which beat analysts’ estimates by 6 cents, or nearly 4%, according to Barron’s. Year to date through Wednesday’s close, shares of Home Depot are up 17% ($133.27 to $156.09), while Lowe’s has gained 19% ($70.48 to $83.75). These companies have P/E ratios of 23 and 24, respectively.
Both Home Depot and Lowe’s have been called Amazon-proof, Barron’s says, since they offer bulky products that are hard to ship, and professional contractors prefer to shop in store. Nevertheless, Home Depot’s online sales were up 23% in the first quarter, Barron’s notes. (For more, see also: Top U.S. Housing Market Indicators.)
However, all four stocks mentioned above retreated on Wednesday, following a disappointing report on housing starts that was released on Tuesday. The U.S. Department of Commerce said that housing starts fell 2.6% in April, to a seasonally adjusted annual rate of 1.17 million units, the lowest level in five months, according to Reuters. Economists had been forecasting a rate of 1.26 million units, Reuters notes.
Other concerns going forward are the impact of rising interest rates on the affordability of mortgages, the possibility of tax cuts being threatened if President Trump is beset by new crises, and worries that GDP growth (and thus growth in disposable personal income) will remain in the doldrums. All these would be negatives for the housing market, for home builders and for building supply companies.