Homebuilders Are Soaring… But Investors Hate Them

This is easily one of the biggest sentiment disconnects I’ve seen in my career…

Now, more than at any time since 2008, folks are calling for a housing crisis. And just about everyone is certain that home prices – and even rents – will fall in the months ahead.

At the surface level, it’s easy to see why…

Nick Gerli is the CEO and founder of real estate tracking company Reventure Consulting. And on Tuesday, he posted the following message on Twitter about KB Home (KBH)…

As Gerli noted, KB Home is one of the biggest homebuilders in America. It’s a great indicator of the space. So when you see a huge shift like that, it does sound “scary” at first.

It’s no wonder many consumers think the housing market is on the edge of collapse.

But as I’ll explain today, the Power Gauge sees this situation in a different way. And you might be surprised to find out how it views the homebuilder industry as a whole…

Without question, rising interest rates have changed the dynamic in the housing market. As you just saw with Gerli’s post, homebuyers’ cancellations surged to record highs last year.

But we need to consider a key point about that stat…

You see, buyers of new homes typically lock in their interest rate around 60 days before closing. But they often make the initial agreement to buy more than a year in advance.

In a falling-rate environment, that’s great for the homebuyer. It means that the expected payment on their mortgage will just get lower and lower as time passes.

On the flip side, higher rates mean higher interest payments.

That should clue you in to what happened with KB Home…

As we all know, interest rates soared over the past year. They went from record lows to their highest levels since the mid-2000s. That can throw off anyone’s budgeting plans…

The table below gives you an idea. It compares the monthly payments for a 30-year fixed-rate mortgage on a $300,000 home at interest rates of 2.9% and 6.9%. Check it out…

That’s a big difference!

So it’s no wonder why so many folks walked away from their potential home purchases. As the example shows, expected monthly payments soared by as much as 58% in some cases.

But importantly… this recent trend doesn’t mean homebuilding is completely finished.

In fact, the Power Gauge sees an incredible opportunity in this space right now…

KB Home is currently rated as “neutral” in the system. But when we take a step back and look at the homebuilding industry as a whole, it’s a much different story…

The iShares U.S. Home Construction Fund (ITB) is rated as “very bullish” today.

This exchange-traded fund (“ETF”) holds a basket of about 50 U.S. homebuilders and related stocks. So it’s a great way for us to “check the pulse” of the entire industry.

In addition to ITB’s “very bullish” overall rating, the Power Gauge is also optimistic about many of the ETF’s holdings. Today, 21 stocks within ITB are “bullish” or better. And only four stocks earn “bearish” or worse ratings. (The rest fall into the “neutral” zone.)

Plus, ITB is already outperforming the market. It’s up roughly 10% in the past six months. In comparison, the S&P 500 Index is down about 2% over that span.

So if I were you, I wouldn’t join the folks expecting a massive drop in home prices today.

Sure, higher rates could continue to put pressure on the housing market.

But that doesn’t mean the industry is completely finished.

We’ve finally flushed out the mismatch between homebuyers with low expected payments and the reality of today’s actual payments. And that’s setting up a bright future.

The Power Gauge sees that. So I recommend keeping an eye on homebuilders, too.

Good investing,

Marc Gerstein

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