Homebuilder stocks fell on Wednesday, despite upbeat data on new home construction, after KeyBanc Capital analyst Kenneth Zener recommended investors sell a number of names, largely due to the history and mathematics.
Zener said the historical performance of homebuilder stocks suggests that inflationary concerns and subsequent interest rate hikes by the Federal Reserve are a “negative factor, superseding fundamental considerations, very repeatedly.”
Earlier Wednesday, US Census Bureau data showed US homebuilders began building new homes at a seasonally adjusted annual rate of 1.7 million in December, up 1% from the month previous, compared to expectations for a decline to 1.65 million. And building permits for new homes rose 9% from November to a seasonally adjusted rate of 1.87 million, well above expectations of 1.71 million.
Despite the strong data, shares of Lennar Corp. LEN,
fell 2.8% in afternoon trading, KB Home KBH,
fell 2.4% and Toll Brothers Inc. TOL,
slipped 3.3%. Indeed, KeyBanc’s Zener downgraded all three companies to an underweight relative to the sector weight.
It also downgraded DR Horton Inc. DHI,
sector weighting from overweight, and the stock fell 2.0%.
The index-listed fund SPDR S&P Homebuilders XHB,
fell 0.9% in afternoon trading. It is down 12.0% since closing at a record high of $86.27 on Dec. 10, while the S&P 500 SPX index,
lost 3.2% over the same period.
Zener explains that since 1969, there have been 19 interest rate tightening cycles and homebuilder stocks have fallen 89% of the time, with an average overall decline of 32% from peak to trough. The sector fell 12% in the first three months after the first rate hike, and fell 21% from the first to the last hike.
And with current inflation at its fastest level in nearly four decades, the Fed is expected to start raising interest rates in March.
Basically, rising rates not only make it more expensive to buy a home, but they can also reduce liquidity in the financial system, making less money available for mortgages.
The overall impact of the rate hike cycles has been an 8% average drop in the home affordability index, Zener said.
Zener’s downgrades come ahead of the first rate hike, as he argues that homebuilders are “early in the cycle,” suggesting they are peaking before the start and peaking before the end of the cycle. cycle. And for Zener, “early means not waiting to find out if fundamental considerations are valid in the future”.
Meanwhile, the “early cycle” also means that a time to start buying builders again can also be inferred.
Zener said rate hike cycles have lasted 10 months on average, and his analysis shows that “builders buying ~75% on tightening
cycle is the best.
If the Fed starts raising rates at the March 15-16 Policy Setting Meeting, this would imply that late October or early November would be the “best” time for builder stocks.