Rates: The Homebuilder Effect

Written by: Global Thought Leadership | April 04, 2019

Chart courtesy of ClearBridge Investments.  Source: ClearBridge, Bloomberg as of 4/4/2019.  Past performance is no guarantee of future results .  Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

THE CHART

The chart shows, for the period August 1, 2018 to April 4, 2019, the gains/losses of the S&P 500 Index and the ISE Exclusively Homebuilder Index.

THE BOTTOM LINE

• Housing accounts for roughly 10% of the US economy, and a significant part of that is the activity of homebuilders.  It’s also one of the most rate-sensitive sectors, as anyone who’s considered buying a house or apartment can attest.
• But long-term fundamentals may matter more when evaluating the prospects for homebuilding stocks going forward – which appear quite strong now, as  ClearBridge Investments points out in a recent article .
• On the one hand, demand for new homes has yet to rise to its normalized level of about 1.5 million units per year.
• Supply is also a positive. Investment in the housing sector collapsed in the wake of the 2008 financial crisis – as the supply of mortgages dried up along with the unravelling of the mortgage-backed debt instruments that backed them.
• The result has been a perceived deficit of available housing – at the same time housing demand is accelerating as millennials reach their 30s and job growth continues to rise.
• These favorable fundamentals may be behind the rapid recovery of the homebuilder stocks after rising mortgage rates beginning in the second half of 2018 triggered a dramatic selloff, as well as a pause in housing starts.
• The Fed’s about-face on rate increases in early 2019 was clearly reflected in the sector’s rebound.
• Even now, with a number of homebuilder stocks trading at below book value even after the run-up so far this year, ClearBridge believes the sector could still be worthy of further examination.

Definitions:

The  ISE Exclusively Homebuilders Index  includes residential construction companies and prefabricated house manufacturers.

The  S&P 500 Index  is an unmanaged index of 500 stocks that is generally representative of the performance of larger companies in the U.S.

Originally published:  RATES: THE HOMEBUILDER EFFECT

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