Everybody Is Piling On The Homebuilders Bandwagon

By: Spencer Israel

 The best-performing non-leveraged equity ETF through the first 10 months of 2019 was not a tech ETF, despite the fact that technology has been the top sector this year. It was not an ETF for an emerging market, even though ETFs tracking both Greece and Russia are up more than 40%. It wasn’t even the Invesco Solar ETF (TAN), which has had an amazing run, up 51% year-to-date.

No. The best-performing non-leveraged equity ETF of the year through October was the iShares U.S. Home Construction ETF (ITB), which is up 52% year-to-date.

Yes, homebuilders, the same industry that underperformed the S&P 500 by nearly 30% in 2018 has been one of the best investment themes of 2019. Together with the Invesco Dynamic Building & Construction ETF (PXB) and the SPDR S&P Homebuilders ETF (XHB), the three homebuilders ETFs are up an average of 46% this year.

And it’s not just the funds. Nearly every single homebuilder stock is up double digits this year, led by names like Meritage Homes (MTH) and KB Home (KBH), which are up 90% and 80% respectively. So, what gives?

 It seems a little counterintuitive that homebuilders would outperform this late in the economic cycle. But the Fed’s decision to lower the federal funds rate three times and a 30-year mortgage rate that has fallen to an average of 3.69%—coupled a seemingly strong seasonality pattern—has helped turn sentiment positive.

On the economic data front, new home construction rose 12% in August, the fastest rate of growth since 2007, which in turn has helped the NAHB Housing Market Index rose to its highest point in almost 24 months in October.

Image source: State Street

 The trend is your friend here, and there may still be room to run yet. As State Street recently wrote in a note, “A strong labor market, rising wages, and favorable demographic changes are likely to continue supporting housing demand and homebuilders’ earnings growth. The homebuilders’ comeback may still have legs, as the industry is trading within the bottom quartile over the past 10 years based on trailing and forward price-to-earnings.”

As you would expect with any market experiencing a huge rally, you don’t have to look very hard to find bullish commentary on the homebuilders. Everybody from State Street, to these analysts, to Jim Cramer is bullish.

And while they may end up being right, investors looking to hop on the train now have to ask themselves just how far they’d be willing to chase. Piling in after 10 months of dramatic gains is the equivalent of buying other peoples’ profits, and the bullish train is looking crowded.

The author has no positions in any of the securities mentioned.


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