Last week, in the midst of
a generally positive week for economic data and
, investors received a bit of a shock on the home data front.
Investors digested news that existing home sales
slipped in March
to their lowest since July 2012. In addition, the U.S. Census
Bureau reported that new home sales
collapsed to a seasonally adjusted annual rate of
384k from 449k in February
, the biggest monthly drop since last summer.
pending home sales data
earlier this week that came in better than economists' estimates,
the magnitude of last week's home sales drop, coupled with
concerns over affordability and rising rates, have many wondering
if last year's housing rebound is already fizzling.
While I would agree that higher rates and rising prices are
likely to slow future home sales gains, I still believe housing
will be additive to the U.S. recovery in 2014 for two
March's print may have been distorted by last winter's
unusually cold weather.
More recent economic data has generally been coming in at, or
While higher mortgage rates are likely to slow housing
activity, overall affordability remains reasonable and credit
conditions are loosening.
While down substantially from the 2011 peak, housing
affordability is still significantly above the 25-year
That said, even if the housing market continues to heal, an
improving housing market doesn't necessarily translate into a
profitable investment thesis for homebuilding stocks. Despite the
recovery in housing, I've been cautious on the homebuilding
industry for some time.
The stocks, as measured by the S&P 500 Homebuilders Select
Industry Index, underperformed the broader market significantly
in 2013, rising roughly 12% versus a 30% gain for the broader
market, as measured by the S&P 500 Index. Year-to-date,
despite falling interest rates, which generally support the
industry, homebuilders are down more than 5%.
In my view, homebuilding stocks have struggled for two
reasons: stretched valuations and vulnerability to rising real
While valuation is less of an issue today, the stocks are not
so cheap as to be unaffected
should rates start to rise again
. Historically, homebuilding stocks have traded at around a 45%
discount to the broader market. This discount reflects the very
cyclical nature of the business and the volatility of the
However, by early 2013, optimism over a housing recovery
pushed valuations to a 14% premium to the broader market. This
left the stocks exposed when rates started to rise last spring.
While valuations have come in considerably - the industry now
trades at a 35% discount to the market (using the same indices
for measurement as I mention above) - the stocks are still not
If real interest rates start to rise again,
as I expect they will
, these stocks should be more vulnerable than most sectors. In
the past, the level of real long-term interest rates has
explained roughly 60% of the variation of the homebuilder
industry's value relative to the broader market (see the chart
below). In other words, when and if real rates start to rise, the
industry's valuations may not provide enough of a cushion. For
now, I'd look for an even bigger discount before recommitting to
Sources: Bloomberg, BlackRock research
Russ Koesterich, CFA, is the Chief Investment Strategist
for BlackRock and iShares Chief Global Investment Strategist.
He is a regular contributor to
and you can find more of his posts
Funds that concentrate investments in a single sector will be
more susceptible to factors affecting that sector and more
volatile than funds that invest in many different sectors.