Homebuilders had a strong close to 2013, despite a weak second half of the year overall. The sector had been stagnant ever since the Fed tapering fears were first voiced and U.S. interest rates took off. Homebuilding stocks digested those fears, however, and had an impressive December rally to close 2013 near the highs.
Ever since the calendar has turned though, homebuilders and homebuilding-related stocks have been underperforming once again (and that’s with rates moving lower since December 31st). The most widely-followed homebuilder ETF, XHB, was down 1.87% yesterday after SCSS guided lower (stock down 19%), hurting other comparables like TPX (-6%). XHB closed below its May and November highs (red line) on yesterday’s decline:
Granted, many of the stocks in the XHB are more on the construction supply and retail side of the business, but the HGX index, comprised of only homebuilders, has a strong correlation and a similar chart pattern (a bit weaker than XHB).
There have been mixed signs on the macro front for housing. New Home Sales have recently registered near multi-year highs (though from a very low base), while Existing Home Sales have been weaker, near a 1 year low on the most recent report. Home Depot’s most recent report in November was solid, while Lowe’s report missed estimates. In December, Lennar reported better than expected results, while KBH missed, and TOL beat, but the stock ended slightly lower.
DR Horton, Pulte, and Ryland all report at the end of January, and the reaction to those results will give a good sense for positioning in the sector early this year. In the meantime, interest rates are the key to watch. The 10 year Treasury yield briefly breached the 3% level last week, but has moved lower for 3 straight trading days. If it remains below 3%, then XHB’s breakdown yesterday might just be a head fake rather than a real break lower.