The Lark Research Homebuilder Stock Index, a composite of 13 publicly-traded homebuilders, rose 7.4% in the week ended September 3, 2010. This compares with gains of 3.75% in the S&P 500 and 4.31% in the Russell 2000.
After underperforming the broader market significantly from late April until the end of June, the Homebuilder Stock Index has regained some lost ground. From July 2 to September 3, the Index advanced 12.6%, compared with smaller increases of 8.0% for the S&P 500 and 7.4% for the Russell 2000. The Index has also managed to post gains for the past three consecutive weeks, during which it has risen 9.8%. By comparison, the S&P 500 was up 2.3% and the Russell 2000 was up 5.6% over this same three week period.
Performance of the Lark Research Homebuilder Stock Index vs. the S&P 500
and Russell 2000
December 28, 2007 = 100
The April-June sell-off was sparked by European debt crisis, which raised concerns that increased demands for fiscal austerity would impede the global economic recovery. Since then, the crisis in Europe has eased, perhaps temporarily, but weaker than anticipated job growth and worse than expected housing production and sales figures have tempered the economic outlook in the U.S..
The weakness in housing follows the expiration of the Federal government's housing tax credit in April. Since then, sales of both new and existing homes have fallen more sharply than anticipated. Some fall-off in housing was expected, because the tax credit pulled some demand forward, but growing concerns about the strength of the economic recovery, and especially the jobs outlook, have apparently caused many buyers to sit on the sidelines.
For the 12 publicly-traded homebuilders that I track, new orders in the second quarter fell 16.3% on average (compared with the prior year) and unit backlogs were down 12.0% at quarter's end. While most everyone acknowledged the negative impact of the expiration of the housing tax credit, many also pointed to the drop in consumer confidence. With mortgage rates at historic lows and house prices still well off their peak, housing affordability is at or near an all-time high. Consequently, any improvement in the economic outlook should translate into higher home sales, off of these depressed levels.
The recent improvement in sentiment, which led to gains across the broader equity markets, has benefited homebuilder share prices. That homebuilder shares have advanced now for three consecutive weeks, far outpacing the major market averages, suggests that investors are anticipating, as I am, a better economic outlook in the weeks ahead.
September 7, 2010
Stephen P. Percoco
Lark Research, Inc.
P.O. Box 1409
Mashpee, MA 02649
(732) 763-0763
webmaster@larkresearch.com
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