US homebuilder shares are appreciating at a record rate this year, reflecting confidence the housing rebound from a six-year slump can accelerate with new-home sales still 50 per cent below the 40-year average.
The Standard & Poor’s Supercomposite Homebuilder Index of 11 companies has climbed 53 percent this year through Aug. 10, compared with a 12 per cent gain for the broader S&P 500 Index. (SPX) Builders, including PulteGroup Inc. (PHM) and DR Horton Inc. (DHI), are raising prices in markets with limited inventory and targeting move-up buyers with more money for down payments and better access to credit than first-time purchasers.
“We’re getting more activity, more traffic and even pricing has begun to improve,” said Jason Benowitz, portfolio manager for Roosevelt Investments in New York, which holds an almost 2 percent stake in Lennar Corp. (LEN) “If the economy can muddle along, then we think housing will continue to be a bright spot. And the homebuilder stocks have room to run from here.”
Shares rallied as new homes sold at a seasonally adjusted annual rate of 350,000 in June, about half the 40-year average, according to Commerce Department data. That’s still an improvement over 304,000 in June 2011 — enough to help engender a big rebound for homebuilders, which underperformed the S&P 500 from 2005 through 2011.
PulteGroup has jumped 98 per cent this year, Lennar is up 59 per cent, Toll Brothers Inc. (TOL) rose 49 per cent and D.R. Horton has increased 43 per cent.
The annual equivalent returns for the S&P homebuilding index so far in 2012 would be more than 100 percent — the best for any year in data going back to 1995. The index lost 87 per cent from a peak in 2005 to its low in November 2008.
“Sales are a long way from where they were, even if you take out the bubble and look at more normal housing cycles,” said Doug Duncan, chief economist at Washington-based Fannie Mae. “While we’re still below a level you would expect to see, we’re on the right direction.”
Single family construction currently accounts for just a fraction of the 0.22 percentage point that housing adds to gross domestic product. Still, it influences a large basket of other businesses with broad impact on economic growth, including Lowe’s Cos. (LOW) and other home-furnishings retailers, and building suppliers such as Owens Corning Inc. (OC)
USG Corp. (USG), which manufactures gypsum wallboard, and Fortune Brands Home & Security Inc. (FBHS), maker of kitchen cabinetry, plumbing products, doors and windows, already are getting a boost from all the building, said Bob Wetenhall, a homebuilder analyst for RBC Capital Markets in New York.
Single-family starts hit a 50-year high of 1.8 million in January 2006 as home prices rose, then sank to a 50-year low by March 2009. After unsteady growth since then, starts have risen in four consecutive months for the first time since 2010.
“For the building-product guys, it’s tremendous,” Wetenhall said. “There’s a lot of fixed costs, and if you get volume, you absorb costs over a large number of units.”
Fortune Brands’ sales jumped 5 percent to $935 million in the second quarter compared with a year earlier on the strength of new-home construction, the Deerfield, Illinois-based company said July 26.
Residential building also benefits rail and trucking companies, contributes to federal and local tax coffers and boosts spending by buyers eager to furnish, decorate and equip their new home. Consumers spend between $6,000 and $8,000 on such products when they buy a house, according to the National Association of Home Builders.
“We’re going back to tradition with the pent-up demand that you typically would get with the recession,” said David Crowe, chief economist of the Washington-based homebuilders association. “Housing is often the spark in a recovery. We see the potential for it igniting momentum.”
For half a century, housing was the tonic that helped restore the ailing economy after slumps. Apartments and new and existing homes added 0.26 percentage point on average to the quarterly growth rate during all expansions since World War II, according to a Fannie Mae analysis. Single-family construction accounted for more than half the contribution before the 18- month recession that ended in June 2009. Now new homes represent about a third.