Homebuilders Break Out

By Greg Guenthner Jun 11, 2016, 8:46 AM 

home construction

Remember rising rates?

We don’t…

With rate hikes falling off metaphorical tables left and right and bond yields plummeting, the market is up to a few of its old tricks. Investors are grabbing gold and utility stocks with one hand and flushing banks down the tubes with the other.

These shenanigans mean only one thing: It’s time to get bulled up on homebuilder stocks.

“Homebuilders are another group that may be benefiting from lower bond yields (which translate into lower mortgage rates),” legendary technician John Murphy explains on his blog over at Stockcharts.com.

The homies are in rally mode again. And it’s time to pay close attention…

We’re no stranger to the homebuilder trade. Late last year, a deluge of data made it clear that the housing market had finally stabilized. Yes, there are outliers—like outrageously high prices in San Francisco. But for most of the nation, the housing market is reverting to something that resembles normalcy.

“After years of volatility, home price growth appears to have stabilized at an annual rate of around 4% to 5%,” The Wall Street Journal reported in late 2015. “Economists said prices, sales and new-home construction are likely to continue to grow moderately going into next year as the market continues its return to normal.”

Remember, we’re a full decade removed from the housing bubble. And after ten years of little to no substantial gains in homebuilder stocks, it’s finally time for these puppies to get moving.

Last year, our iShares Dow Jones U.S. Home Construction ETF (ITB) position was our only long-term trade of the year that has survived the August rout. It was the market meltdown earlier this year forced us to sell.

But right now, it’s clear that there’s a major breakout in the works for the underperforming homebuilders. And if we jump onboard now, we could be in for a heck of a ride…

The iShares Dow Jones U.S. Home Construction ETF has climbed to new 2016 highs this week. After a gut-wrenching winter, the homebuilders have fought back with a vengeance.

Of course, there are plenty of reasons to argue against homebuilder stocks—and the American housing market. Homes in many popular cities are too expensive. Young families are stuck with high student loans and car payments. And my personal favorite: Millennials will never get married, never have kids and therefore never buy houses.

But when you break down the facts and figures, it’s clear that housing is reaching a tipping point. Homebuilders haven’t focused enough on single-family homes since the financial crisis. And they’re going to have to play catch-up.

“Housing is set to eat the U.S. economy,” explains Conor Sen, a portfolio manager at New River Investments

Sen argues that because we’re near record lows for construction unemployment, the industry will need to add 550,000-to-600,000 construction workers over the next few years. Sen says it will have to poach from other industries like agriculture and manufacturing in order to get housing back to a driving economic force.

As the homebuilders make up for lost time, they’ll begin to reward savvy investors. Lucky for us, price leads the news. And there are plenty of homebuilder breakouts to choose from.

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