Charlotte County Florida Weekly

Now is the time to invest in homebuilding, construction stocks

MONEY & INVESTING



 

 

If you ask an average homeowner across the U.S. how the housing market is performing, the vast majority would say fantastic. After all, home prices are close to historical highs and when houses are listed they are quickly sold. One would think that in such an environment, homebuilder and construction stocks would also be performing very well. But the opposite is true. In fact, just last week, the largest ETF that tracks these companies fell into bear market territory, falling over 20 percent in 2018. Many of the stocks that make up this index have fallen more than 50 percent in the last several months. Why are publicly traded homebuilders and construction companies falling while the housing market is doing so well? What does that tell us about the housing market going forward?

The iShares US Home Construction ETF (Ticker ITB) is a $1 trillion asset fund that tracks U.S. companies in the home building sector. The largest companies in this fund are the publicly traded homebuilders like Lennar Corp. and D.R. Horton. However, it also contains companies like Home Depot and Sherwin Williams.

 

 

Some companies, like Home Depot, have held their ground in 2018. Most have not, with the homebuilders and material providers like Lumber Liquidators getting beat down by the markets. In fact, more than 80 percent of the firms in the fund have lost more than one fifth of their value this year. There are three primary reasons that investors have lost faith in these stocks. The first is rising interest rates. While mortgage rates have only risen by around .75 percent this year, many analysts fear that rates will be significantly higher in the years ahead. And that would increase the price of houses for most homebuyers.

Second, many commodity prices are starting to increase both because of higher demand and the Trump administration’s tariffs. These make houses more expensive to build and the construction companies are not always able to pass these higher costs on to the consumer in the short run.

And finally, homebuilders are suffering because of an unwillingness to produce high volume of product. With a dramatic increase in land and building supplies, home manufacturers are hesitant to commit to large-scale projects unless they can be fairly certain that they will sell at a high price point. Many still remember what happened before the financial crisis when they were stuck with massive inventory when the market turned. As a result, sales are not as robust as many investors and analysts would like.

Despite these problems, some analysts believe that this correction in the housing sector is too great and these companies are a great value at these levels.

While every investor wants to exit a position before an inflection point, I believe that a 20 percent to 50 percent drop in stock price while current market fundamentals are so positive does represent a good risk/reward at this point.

Homebuilders are still optimistic. Earnings are good. Home prices continue to rise. As a result, I would be a buyer of both the homebuilders’ ETF along with many of the individual companies that make up this fund. ¦

— Eric Bretan, the co-owner of Rick’s Estate & Jewelry Buyers in Punta Gorda, was a senior derivatives marketer and investment banker for more than 15 years at several global banks.

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