A turnabout by the new home sales naysayers looks near. The reason? The consensus expectation of a 2% decrease in purchase mortgage applications was just upended by the reported 10% increase. That is excellent homebuilder news, as explained by Econoday.com:
… a very sizable 10.0 percent jump in purchase applications, a jump that points to greater strength for home sales. The average 30-year conventional loan fell 11 basis points in the week to 4.12 percent for the lowest level since September 2017.
The Mortgage Bankers’ Association compiles various mortgage loan indexes. The purchase applications index measures applications at mortgage lenders. This is a leading indicator for single-family home sales and housing construction.
Disclosure: Author holds PulteGroup
Refinancing mortgage applications also leapt: 47% versus a 6% expectation. While it is the purchase applications that support a positive home buying outlook, the large increase in all applications shows the positive effect from the decline in longer-term interest rates.
Homebuilder stocks: Don’t think ‘cheap’ – Think ‘bargain-priced’
When a group of stocks is neglected or gets an undue negative aura, investors naturally avoid them. Such instances rarely last long. All that is needed is unexpected good news, and that is what just happened.
Here is how the top ten homebuilders’ stocks looked at the June 12 close. Notice all those low-risk, attractive ~10x PE ratios.
Next up: The May reports of housing starts (June 18) and new home sales (June 25)
Housing starts and new home sales are key indicators, and not just for homebuilders, as Econoday.com explains:
Why Investors Care [about housing starts and new home sales reports]
Two words…Ripple Effect. This narrow piece of data has a powerful multiplier effect through the economy, and therefore across the markets and your investments. By tracking economic data such as housing starts, investors can gain specific investment ideas as well as broad guidance for managing a portfolio.
Homebuilders usually don’t start a house unless they are fairly confident it will sell upon or before its completion. Changes in the rate of housing starts tell us a lot about demand for homes and the outlook for the construction industry. Furthermore, each time a new home is started, construction employment rises, and income will be pumped back into the economy.
Once the home is sold, it generates revenues for the homebuilder and a myriad of consumption opportunities for the buyer. Refrigerators, washers and dryers, furniture, and landscaping are just a few things new homebuyers might spend money on, so the economic “ripple effect” can be substantial….
The “contrarian” bonus
Last month’s new house sales report contained changes that were completely missed by the fast media reports using only the top line numbers. It was a rare instance when a good report is misconstrued as bad (See “Media Grossly Misinterprets New Home Sales Report. Two Firms Got It Right” for explanation.)
With so many negative reports, it is small wonder investors have ignored homebuilders. However, whenever investors unduly avoid stocks, they provide willing buyers with a contrarian opportunity – a bonus higher return/lower risk benefit.
The bottom line
The unexpected purchase mortgage application jump is an excellent sign of more good news to come in the housing starts and new home sales reports. Moreover, because the previous new home sales report was viewed incorrectly as negative, attitudes about new home sales and homebuilders could swing significantly.
Therefore, now looks to be an especially good time to own homebuilder stocks.
For additional information and analysis, see: