Cash In on the Housing Market

It’s only mid-January, but the “For Sale” signs are popping up like dandelions in the Boston area. I notice them while driving around and keep a mental note of how many are adorned with the desired “Under Agreement” placard soon afterwards.  Given the speed that houses are going under contract, the housing market on this coast looks robust.

So I was surprised to see this headline last Friday in the Wall Street Journal: “New Homes Sales Fell Sharply in December.” Now, I’m not silly enough to believe that my little microcosm of Boston mirrors the housing market in the rest of the country, but I’ve been hearing about the same strength from friends who are relocating and searching for new homes in far-flung states.

In fact, D.R. Horton, one of the nation’s largest homebuilders, reported robust demand for new houses last week. For the quarter ending in December, D.R. Horton’s sales shot up 17% and were $218 million higher than expected. Its stock rose 4% and is now up 8% since the release.

As always, when filtering through data, I analyze the details to get a better sense of recent trends. That’s critical because many stocks in the Profit Catalyst Alert portfolio are tied to the housing market, from a leading door manufacturer to a drywall distributor with a winning formula for delivering materials to builders. The portfolio even includes a provider of intelligent lighting and heating systems for residential as well as commercial buildings. So what was I to make of the mixed messages I was getting about the housing market?

First, the new home sales data from the Commerce Department is for the month of December, a notoriously volatile month. The data showed that sales of newly built single-family homes dropped 10% from the previous month. Last year, new home sales in December rose a surprising 11%. Neither year’s results swayed the annual number dramatically. December represents a small portion of annual sales, as most consumers are too busy getting ready for the holidays to shop for new homes.

I think the more important number to watch is the year-over-year growth for annualized new home sales. This number is adjusted for the seasonal variations, with slow December receiving less weight than frenzied May when realtors’ phones are ringing off the hook.

This number grew 12% year-over-year. Month-to-month variances in any data set can be tricky. The December 2016 new home sales data were recorded just after the Federal Reserve raised interest rates one-quarter point, a change that nudged up borrowing costs. Sales of new homes are recorded when the initial contract is signed, so this data point reflects recent trends. In this case, some buyers likely put off purchases to see how the real estate market might react to higher mortgage rates.

Management from D.R. Horton specifically called out solid trends for January, good news for those who worried December signaled a downturn. In addition, home pricing looks strong.

While D.R. Horton sold 15% more homes than the previous year, higher prices boosted overall sales growth to 17%. This increase in price is particularly important to the companies that supply goods to these homes, like those in the Profit Catalyst Alert portfolio. Higher-priced homes typically include more bells and whistles that can translate into higher profits for the companies supplying materials to homebuilders.

Although monthly gyrations in new home sales can unsettle investors’ nerves, the longer-term picture looks quite positive. Ralph McLaughlin, chief economist at real estate company Trulia, notes that the number of housing starts is still well below normal: “Controlling for the number of households in the U.S., housing starts are still only 55% of the 50-year average.” Given those numbers, he believes there’s more room for housing starts to grow.

In the meantime, I’ll be following each news release closely and pulling apart the crosscurrents to make sure recent trends support the bull case for the Profit Catalyst Alert portfolio.

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