Spring Selling Heats Up; What’s Next for Homebuilders?

Spring selling season is heating up across the country, but will homebuilders benefit? Let’s take a technical look at the S&P 500 Homebuilder Index, which is a gauge for the industry’s growth. As the green line in the chart below indicates, the most recent month-end price for the index remains above its 10-month moving average, suggesting a long-term bullish trend that began in January 2011 remains intact[1].

New Home Sales

Each month the U.S. Census Bureau reports the volume of new, single-family houses sold in the U.S.   The next report is scheduled for release on Tuesday, April 25 with the consensus estimate (average estimate of a sample of economists) at 583,000.[2]

One metric used to determine sentiment towards homebuilders, which influences price movement, is new home sales volume versus the consensus estimate. Looking back over the past 10 years (see below table), the reported data beat the consensus 47 times, or 39% of the time. Six months later, the S&P 500 Homebuilder Index was higher 57% of the time by an average price return of 6.7%.  Looking out 12 months, the returns were higher 60% of the time, with an average price return of 14.5%.

If new home sales volume is lower than the consensus, longer-term returns still tend to be modestly higher. Over the same period, the reported data were lower than the consensus value 61 times, yet twelve months later the S&P 500 Homebuilder Index was higher 57% of the time by an average price return of 3.9%.

We will continue to monitor new home sales data as the spring selling season continues to help determine whether homebuilders may to continue to move higher.

[1] A rule of thumb is that if the price is above its moving average, the trend is likely to be upward sloping or bullish.  Some technical analysts use a monthly price chart with a 10-period moving average to evaluate the long-term trend.

[2] Bloomberg data, 4/21/17

 

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Past performance is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.

The economic forecasts set forth in the presentation may not develop as predicted.
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Because of their narrow focus, specialty sector investing, such as healthcare, financials, or energy, will be subject to greater volatility than investing more broadly across many sectors and companies.

US New One Family Houses Sold Annual: This index tracks sales of newly constructed homes during the reference period. The Implicit US index is computed by taking the number of houses sold in the US and dividing it by the seasonally adjusted number of houses sold in the US.

S&P 500 Homebuilding Sub Industry GICS Level 4 Index: Standard and Poor’s 500 Homebuilding Index is a capitalization-weighted index. The index was developed with a base level of 10 for the 1941-43 base period. The parent index is SPX. This is a GICS Level 4 Sub-Industry group. Intraday values are calculated by Bloomberg and not supported by S&P DJI, however the close price is the official close price calculated by S&P DJI.

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