By Philip van Doorn, MarketWatch
What a difference a few months can make.
During 2018, and especially during the fourth quarter, investors were concerned about rising interest rates and were beginning to fear that a recession was looming. Mortgage-loan interest rates were rising. All this caused a predictable plunge in share prices for most home builders.
But 2019 so far has been a different story, and there are signs the upward path for this industry will continue.
This chart shows weekly price movement for the S&P Composite Index’s homebuilding subsector since the end of 2017:
(The S&P Composite 1500 comprises the S&P 500 /zigman2/quotes/210599714/realtime SPX +0.24% , the S&P 400 Mid Cap Index /zigman2/quotes/210599897/delayed MID +0.07% and the S&P Small Cap 600 /zigman2/quotes/210599868/delayed SML +0.51% .)
Here’s how shares of the 13 home builders in the subsector have performed this year and last year:
|Home builder||Ticker||2019 through March 14||Fourth quarter, 2018||2018|
|William Lyon Homes Class A||42%||-33%||-63%|
|LGI Homes Inc.||/zigman2/quotes/202461766/composite LGIH||28%||-5%||-40%|
|M/I Homes Inc.||/zigman2/quotes/200736509/composite MHO||25%||-12%||-39%|
|KB Home||/zigman2/quotes/206220859/composite KBH||24%||-20%||-40%|
|Lennar Corp. Class A||/zigman2/quotes/202536373/composite LEN||23%||-16%||-38%|
|D.R. Horton Inc.||/zigman2/quotes/202032328/composite DHI||18%||-17%||-31%|
|Meritage Homes Corp.||/zigman2/quotes/209069331/composite MTH||18%||-8%||-28%|
|TRI Pointe Group Inc.||/zigman2/quotes/204302452/composite TPH||18%||-12%||-39%|
|NVR Inc.||/zigman2/quotes/209548385/composite NVR||12%||-1%||-31%|
|M.D.C. Holdings Inc.||/zigman2/quotes/203145113/composite MDC||10%||-4%||-8%|
|Toll Brothers Inc.||/zigman2/quotes/201912487/composite TOL||10%||0%||-31%|
|PulteGroup Inc.||/zigman2/quotes/201694804/composite PHM||5%||5%||-21%|
|Cavco Industries Inc.||/zigman2/quotes/206244792/composite CVCO||-7%||-48%||-15%|
During a phone interview on March 15, Alvaro Lacayo, vice president of equity research at Gabelli & Co., said home builders started 2018 with “a good order season, but as rates started to rise in September and October, there were concerns.”
Investors’ macroeconomic concerns shifted from a rate-driven slowdown for housing to fear of a recession, Lacayo said. “Because this is a very cyclical sector, it magnified the selloff,” he added.
You can see from the first chart that despite a sharp rally so far this year, the homebuilding subsector isn’t close to where it was a year ago.
But industry sentiment is strong, according to the latest National Association of Home Builders’ monthly confidence index.
Policy change and good economic signs
Last year, the Federal Open Market Committee raised the federal-funds rate four times to its current target range of between 2.25% and 2.50%. On Jan. 30, Federal Reserve Chairman Jerome Powell reversed course, saying the economic signals for further increases in interest rates had “weakened” and that the central bank might adjust or stop the reduction of its balance sheet, which has been taking liquidity from financial markets.