On May 15, I shared three reasons homebuilding stocks would be long-term outperformers.
Here is why I liked the sector…
1. There has been more than a decade of massive underbuilding new homes in the United States since the housing bubble popped in 2008.
The country will have a strong appetite for the product that homebuilders deliver for years to come.
2. Interest rates are low, and they aren’t going anywhere anytime soon.
The Federal Reserve has flat-out told us as much, and that means that we will see historically low mortgage rates, stimulating buyer demand.
3. Share prices of homebuilders are cheap.
The entire sector has underperformed the overall market since the COVID-19 outbreak started in the U.S.
That was my three-part investment case for homebuilders on May 15. I said that I was bullish on homebuilders for the long term, but I made no such prediction about the short term.
Nonetheless…
Already Trading at All-Time Highs
Barely three months have passed, yet everything about the sector has changed. Business is booming, and share prices have soared.
At one point during the coronavirus-induced spring market panic, the SPDR S&P Homebuilders ETF (NYSE: XHB) was down almost 50% year to date. The entire sector had been cut in half.
As of today, the index not only has recovered that loss, but is actually up 18% for the year.
The entire sector has more than doubled in just five months. It now trades at levels it hasn’t seen since 2005 at the peak of the American housing bubble (when these companies were posting record earnings).
This quick rebound was possible only because the housing market has been on fire.
Underpinned by record-low mortgage rates, existing home sales surged by a record 24.7% in July. That followed an impressive 20.7% increase in existing home sales in June.
The National Association of Realtors’ top economist summed things up when he said that the U.S. housing market is now past the COVID-19 recovery phase… Now it is booming.
A Changing Value Proposition
The long-term business prospects for this sector are still excellent.
Interest rates remain low, the industry has underbuilt for a decade and there is pent-up demand from families who have deferred buying homes.
However, companies in this sector are not as attractive as they were just a few months ago. That is what happens when share prices more than double…
Investors are now paying two times more for the same long-term earnings power of these companies than they were when I pounded the table.
And as Warren Buffett is fond of saying, “Price is what you pay—value is what you get.”
The true value of homebuilding companies hasn’t changed much over the past few months, but their prices certainly have.
I don’t think the sector is overvalued at this point, but it certainly isn’t undervalued like it was a few months ago.
Now would be a great time to lock in the big profits you are sitting on if you bought into this sector earlier in the year.
There are other opportunities out there that offer more value for those investment dollars.
Stay tuned, and I’ll continue bringing them to your attention.
Good investing,
Jody Chudley
For Cashflow For Retirement
