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.
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(END) Dow Jones Newswires
August 23, 2015 19:14 ET (23:14 GMT)
Copyright (c) 2015 Dow Jones & Company, Inc.
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