The Lark Research Homebuilder Stock Index, a composite of 13 publicly-traded homebuilders, rose 2.33% in the week ended January 29, 2010. This compares with losses of 1.64% in the S&P 500 and 2.44% in the Russell 2000.
Throughout most of 2009, the builders had outperformed the broader market, but they began to underperform (along with the financials) going into the fourth quarter. In my last update (on October 30, 2009), I thought that this correction would end relatively soon, so that homebuilder stocks would perform well going into the end of the year. As it turned out, they continued to underperform until early December and then finished the year with a modest price surge.
Since the beginning of 2010, homebuilder stocks have outperformed the broader market, even during the recent bout of market weakness. So far in 2010, they are up 4%, while the S&P 500 and Russell 2000 are each down 3.7%.
Performance of the Lark Research Homebuilder Stock Index vs. the S&P 500
and Russell 2000
December 26, 2003 = 100
The strong relative performance of homebuilder stocks has run on despite some recent weakness in the housing data. The Commerce Dept. reported last week that new home sales fell 16% from a seasonally-adjusted annual rate of 408,000 in October to 342,000 in December. Similarly, single-family housing starts bounced from 471,000 units in October to 490,000 units in November before dropping to 456,000 units in December.
The latest data suggests that buyers sat on the sidelines during the holiday season. However, single-family permits rose 8% in December and were up 37% over the prior year. So builders are apparently more optimistic about the upcoming Spring selling season, which officially gets underway in February. With low mortgage rates and generous tax incentives, buyers are likely to come out in greater numbers, especially if the economy shows further improvement.
Despite the slowdown in December housing activity, the publicly-traded builders are reporting signs that business is turning up. Preliminary results from those builders who have reported so far show that new orders in the fourth quarter rose at a rate in excess of 25%. Admittedly, most of the increase is due to a sharp decline in cancellations (from the peak of the financial crisis last year). Still, any meaningful increase in sales activity should lead to improved financial performance, given the significant reductions in operating costs and inventory impairment charges taken by these builders over the past few years.
To be sure, the expected modest recovery in housing may not last beyond the Spring selling season, when housing tax credits are due to expire. The Federal government has still not solved the looming foreclosure crisis, which could put more inventory on to the housing market and push house prices lower. Unforeseen geopolitical events could also derail the economic recovery.
However, those factors will probably not impede the recovery in the housing sector over the next few months. As a result, I believe that homebuilder stock prices still have the potential to outperform the broader market in the months ahead and perhaps longer, if the foreclosure problem is solved and economic rebound is sustained.
January 30, 2010
Stephen P. Percoco
Lark Research, Inc.
P.O. Box 1409
Mashpee, MA 02649
(732) 763-0763
webmaster@larkresearch.com
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