PHM PulteGroup Inc

By Saumya Vaishampayan And Dan Strumpf 

Rattled by last week's rout, stock investors are taking comfort in a corner of the market that remains standing: housing stocks.

Stock markets have been pounded in the past week amid mounting evidence that global growth is hitting the skids, and the Dow Jones Industrial Average on Friday entered a correction, referring to a drop of 10% from a recent peak.

Yet many investors say the recent plunge in stocks is unlikely to turn into an outright collapse, in large part because core areas of the U.S. economy--including the housing sector and related industries--are still on relatively solid footing.

The $2.1 billion SPDR S&P Homebuilders Exchange-Traded Fund, which tracks shares of companies ranging from home builders to mattress makers, is up 9.2% in the year to date. The S&P 500 has fallen 4.3% in the same period. On Friday, the fund's shares fell 2.3% compared with a 3.2% decline in the broader index.

"The last couple of days, the housing sector has been showing strength when the rest of the market appears to be breaking down," Craig Hodges, portfolio manager of the $2 billion Hodges Small Cap Fund, said late Thursday.

The trend marks a reversal from the last S&P 500 correction in 2011, when housing stocks trailed the broader market for the year.

Mr. Hodges said he has been building stakes in a handful of home-building companies, including D.R. Horton Inc. and PulteGroup Inc., as a bet on sustained growth in the housing market. The stocks have gained 4.4% and 1%, respectively, in August.

Through July, investors have poured $298.3 million into the SPDR S&P Homebuilders ETF, which is on track for its first year of inflows since 2012, according to Morningstar.

Lawrence Kemp, portfolio manager on the $3.5 billion BlackRock Capital Appreciation Fund, has long-standing bets on companies tied to home repair and remodeling because he is optimistic about the housing market. "It's important to remember that the U.S., on a relative basis, continues to be in a strong position," he said. "The U.S. [stock] market, after this correction, is a potential bright spot."

The housing market's recovery from the subprime-mortgage crisis and the Great Recession has been a bumpy one. Home buying and construction slowed in 2013 after jobs growth hit a soft patch and borrowing costs spiked during the so-called taper tantrum.

Lately, though, the housing sector has gained steam, and some money managers say that could help offset the weakness in China and other emerging markets that have roiled markets.

Despite the jump in housing shares over the past year, many remain well below their peaks, which some money managers argue gives them more room to run. The SPDR S&P Homebuilders ETF is 20% below its record from April 2006, according to FactSet.

In July, housing starts rose to the highest level since October 2007. Sentiment among home builders is at its highest level in nearly a decade, according to a gauge from the National Association of Home Builders.

This week, investors will be watching for reports on new and pending home sales in the U.S., in addition to a second reading on second-quarter economic growth.

A loosening of lending rules has made it easier for first-time home buyers to get mortgages, while a continued improvement in the labor market has made buyers more comfortable taking on debt.

"Before the crisis, you could breathe on a mirror and get a loan," said Iman Brivanlou, head of the high-income equities group at TCW Group. "Then the opposite happened...Now it's beginning to ease. It's become easier to get a home mortgage."

Mr. Brivanlou has bets on M.D.C. Holdings Inc., whose subsidiaries build homes under the Richmond American brand. That stock has advanced 12% this year. He also holds two timber real-estate investment trusts tied to the housing sector: Weyerhaeuser Co. and Plum Creek Timber Co.

Some investors already are worried about stock valuations. For example, shares of Home Depot Inc. have risen 11% in 2015 and are trading at 22.6 times the past 12 months of earnings, higher than the 10-year average of 18.2.

Bob Landry, portfolio manager at USAA Investment Solutions, holds Home Depot shares and is considering whether to trim his position.

"It's starting to look a little pricey to me," he said. "It's had a great run here and I'm just afraid that if they stumble a little bit, the stock could really take a pretty hard hit."

Still, bullish investors expect the pace of home buying to quicken, especially as some prospective owners rush to purchase ahead of any increase in short-term interest rates by the Federal Reserve.

Alex Imas, 30 years old, is looking to buy a house in Pittsburgh after watching the monthly rent on his one-room loft apartment in the city's Lawrenceville neighborhood rise to $1,500.

"The renting market is not great, but the housing market has tremendously rebounded," said Mr. Imas, an assistant professor at Carnegie Mellon University. "It's been growing since I've been there the last two years."

Even when the Federal Reserve begins to lift interest rates--a move that some market watchers speculate will be delayed from a widely anticipated date of September due to global-growth concerns--any tightening will be gradual, analysts say. That would leave the overall level of rates relatively low, which should continue to support home buying.

Access Investor Kit for "D.R. Horton, Inc."

Visit http://www.companyspotlight.com/partner?cp_code=P479&isin=US23331A1097

Subscribe to WSJ: http://online.wsj.com?mod=djnwires

(END) Dow Jones Newswires

August 23, 2015 19:14 ET (23:14 GMT)

PulteGroup (NYSE:PHM)
Historical Stock Chart
From Apr 2024 to May 2024

PulteGroup (NYSE:PHM)
Historical Stock Chart
From May 2023 to May 2024