US Homebuilders Getting Closer to Historic Uptrend

Investing

The iShares Dow Jones US Home Construction ETF (ITB) is trading within two points of 2018’s bull market high after east coast builder Lennar Corporation (LEN) reported better-than-expected fourth quarter profits and revenues. That stock rose 5% after the news but pulled back when it guided first quarter earnings per share (EPS) just below modest estimates. Even so, company executives confirmed that strong demand has returned in the supply-constrained entry home category, indicating that Millennials finally have the capital needed to become homeowners.

The 2019 bond sell-off dropped fixed-rate mortgages back to levels posted in the middle of the past decade, underpinning the housing sector. Millennial income has increased substantially since that time, setting ideal conditions for a homebuying resurgence that could last for many years. Given this tailwind, homebuilder stocks and funds look like bargains here, especially for regional companies in the fast-growing parts of the country. 

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The iShares Dow Jones US Home Construction ETF came public in the upper $40s in May 2006 and entered an immediate downtrend despite the last wave of that decade’s real estate bubble. The fund bottomed out at an all-time low in the single digits in March 2009 and turned higher into 2010, stalling in the mid-teens. A secondary decline ended just above the prior low in 2011, completing a double bottom reversal that set the stage for a new uptrend.

The subsequent rally eased into a rising channel after reaching the mid-$20s in 2013, with that stable pattern persisting into a 2017 breakout. The uptick finally stalled about four points under 2006’s all-time time high in January 2018, giving way to a major correction that posted a two-year low in the $20s in December. The fund spent the first 10 months of 2019 recouping the majority of those losses and now looks ready to challenge 2018 resistance

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Lennar Corporation topped out in the upper $60s in 2005, following a multi-year uptrend, and entered a downtrend that accelerated during the 2008 bear market. Selling pressure ended at a 13-year low in the deep single digits, giving way to a bounce that stalled in the low $20s in 2010. The stock broke range resistance in 2012 and headed higher, easing into a shallow channel in 2013. The rally topped out after a January 2018 breakout stretched four points above the 2005 peak.

The stock has spent the past two years carving a broad trading range that could eventually complete the handle of a 15-year cup and handle breakout pattern. It is now trading in the upper half of the range and could complete the round trip some time in 2020. A breakout into the $70s has the potential to generate healthy long-term profits, with a measured move target up in the $130s.

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Arizona’s Meritage Homes Corporation (MTH) also looks like a top pick, with solid price action and a booming local housing market. The Phoenix metropolitan area is benefiting from rapid growth, both from Californians looking for desert living and cheaper prices as well as retirees from Chicago and other Midwestern venues. This harmonic convergence has absorbed the large supply of homes abandoned after the 2008 economic collapse, forcing builders to play catch-up.

Meritage Homes stock posted an all-time high at $96.50 in 2005 and entered a severe decline that hit an eight-year low at $5.10 in November 2008. The subsequent recovery stalled in the upper $40s in 2013, giving way to a choppy trading range that persisted into a July 2019 breakout. The subsequent uptick reversed at the .786 Fibonacci retracement of last decade’s downtrend in October, yielding an orderly decline that has now found support at the 200-day exponential moving average (EMA). Relative strength readings are slowly reaching oversold levels, raising the odds for a low-risk buying opportunity in the low $60s.

The Bottom Line

Homebuilders are benefiting from lower mortgage rates, supply constraints, and Millennials ready to raise families.

Disclosure: the author held no positions in aforementioned securities at the time of publication.  

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