Homebuilder Shares Dramatically Underperforming: Consumer Confidence Didn't Help

Homebuilder shares are down 12% to 23% while the stock market is up 9%. Housing data has been miserable.

The Wall Street Journal reports Home-Builder Shares Miss Out on Stock Rally

>Consumer confidence tracking near 18-year highs, strong corporate earnings and soaring retail sales havent translated into gains across the housing marketsomething that has kept home-builder shares from reclaiming the highs they hit at the start of the year.

>Even as the broader stock market has clawed its way back to all-time highs, big, publicly traded home builders have lagged behind, with shares of Lennar Corp. down 17% this year, D.R. Horton Inc. losing 12%, Toll Brothers Inc. down 23% and PulteGroup Inc. shedding 15%. In comparison, the S&P 500 is up 9% this year.

None of this is surprising given the housing data. Existing home sales are down for the fourth month. New home sales fell 1.7%. Mortgage rates are rising and the yield curve is flattening.

The question is "where to from here?"

Confidence? So What?

>Confidence is soaring to new heights which makes us bullish on growth and forecasts that this expansion may indeed shatter records for longevity next summer, said Chris Rupkey, chief financial economist at MUFG, in an email. The consumer says the economic times we live in is better than you think.

The obvious problem with the confidence theory is that reality doesn't match. Even with the surge in consumer spending on the heels of tax cuts, it did not translate into home sales.

Why?

Affordability. Wages are not keeping up with inflation. And inflation is way understated because home prices, which have soared are not counted in inflation stats.

It will take a decline in home prices, lumber prices, and fixture prices to fix this problem.

Guess what? If all those happen, consumer confidence will not be so high.

Related Articles

  1. New Home Sales Sink 1.7% to 627,000 Units: Builder Spec Homes Most Since 2009
  2. Flattening Yield Curve in One Picture
  3. Pre-Tax Corporate Profits Rise 0.2%, After-Tax Corporate Profits Rise 6.7%
  4. Existing Home Sales Decline Fourth Month

When people cannot afford to buy homes, they eventually stop buying them.

What took them so long?

Mike "Mish" Shedlock

Comments (9)
No. 1-7
DFWRealEstate
DFWRealEstate

"When people cannot afford to buy homes, they eventually stop buying them." And the Fed, having run the table in re-inflating home prices back to record highs, made homes unaffordable for many once interest rates hit 4.5 percent. It was almost like someone rang a bell. Some were suggesting that it would take rates of 5.0 percent for a slowdown to occur, but apparently a measly 1 percent rise in mortgage rates was enough to cause housing momentum to falter. Proof once again, that people buy payments, not just prices.

oudaveguy98
oudaveguy98

I don't dispute the data, trends, or convincing arguments on here about housing. But the explosion in new homes continues in Colorado Springs. 40 new homes being put in behind my yard right now, and thousands more nearby......I realize C-Springs may be an anomaly, but it is real. I'm stunned at the growth here.

Casual_Observer
Casual_Observer

The other thorn in homebuilders is the new tax code no longer makes it a good investment to buy a home. Everything is limited and capped. Mortgage interest is no longer a factor in many states. SALT is even worse.

RonJ
RonJ

Reminds me of when Cramer said he woulldn't sell a Toll brothers because it was a land bank. However, the Toll brothers did sell hundreds of millions worth of their own stock.

Advancingtime
Advancingtime

In America, the government, coupled with a slew of builder and Realtor associations control the housing narrative. Huge discrepancies exist in the cost of housing in the various markets across America and while price variations are not uncommon they should be seen as a reason for caution.

The future of the housing market is a topic that has been subject to a great deal of debate and can be somewhat confusing. The intention of the post below is to shed light on some of the myths that have been generated and add some clarity to the discussion of where housing policies are taking us.