Inflation, rising interest rates, and a shortage of available homes for sale have taken a toll on the residential real estate sector during the ongoing pandemic. However, amidst the gloom, there is a glimmer of hope in the form of home construction. Recent news reveals that new-home sales have actually seen a rise, providing a much-needed boost to this industry.
Leading builders such as D.R. Horton, Lennar, and NVR have seen their stocks surge by impressive margins of 29% to 33% this year, surpassing the S&P 500’s gain of 13%. Notably, smaller builders have fared even better with Green Brick Partners and Beazer Homes USA, both boasting market caps below $3 billion, experiencing impressive returns of 108% and 112% respectively.
Comparing May’s figures, sales of previously owned homes, which constitute the majority of transactions, were down by 20% compared to last year. In stark contrast, new-home sales saw a 20% increase. With mortgage rates reaching 6.81%, homeowners with lower rates are opting to remain in their current homes. This trend provides an opportunity for builders to step in and fill the void.
This prevailing market imbalance is expected to persist throughout the year, ensuring continued success for the stocks in question. Wedbush analyst Jay McCanless believes that demand has reached a level where builders can now raise prices, creating a favorable tailwind for the industry as a whole.
Looking ahead to the next few months, most builders are set to release their quarterly earnings reports in mid- to late July. As the housing market started to normalize last summer after its frenzied pandemic pace, the anticipated easier comparisons in the second half of the year present an optimistic outlook.
Carl Reichardt, an analyst at BTIG who holds Buy ratings on PulteGroup, D.R. Horton, and Lennar, acknowledges the uncertain outlook for builders’ margins due to rising rates. However, he remains confident that if inventories remain sparse and these companies continue to adopt a disciplined pricing approach, homebuilders are poised to gain market share.
Next Week: A Glimpse into the Future
The Federal Reserve Reports Consumer Credit Data for May
According to the Federal Reserve, consumer credit in May reached a record high of $4.86 trillion. This represents a 5.7% increase from the previous month. The growth was primarily driven by a significant rise in revolving credit, including credit-card debt, which surged by 13.1%. Nonrevolving credit, such as home mortgages and auto loans, also saw a modest increase of 3.2%.
President Joe Biden Attends the 74th NATO Summit in Vilnius, Lithuania
President Joe Biden is set to participate in the 74th NATO Summit in Vilnius, Lithuania. The summit will run for two days and provide an opportunity for important discussions and collaborations among NATO member countries.
The National Federation of Independent Business Releases Small Business Optimism Index for June
The Small Business Optimism Index for June will be released by the National Federation of Independent Business. Experts predict a reading of 89.9, slightly higher than the previous month. Despite this slight improvement, the index remains near a decade low, with small businesses continuing to face challenges due to supply-chain disruptions, labor shortages, and other factors.
The Bureau of Labor Statistics Releases Consumer Price Index for June
The Bureau of Labor Statistics will unveil the consumer price index (CPI) for June. Economists anticipate a year-over-year increase of 3.1%, which is nearly a full percentage point lower than May’s figure. The core CPI, which excludes the volatile prices of food and energy, is expected to rise by 5%, three-tenths of a percentage point less than previously projected. Both the CPI and core CPI are at their lowest levels since March and November 2021, respectively.
The Bank of Canada Announces Monetary-Policy Decision
The Bank of Canada is scheduled to announce its monetary-policy decision. Market traders are currently factoring in a two-in-three chance that the central bank will raise its key short-term interest rate by a quarter of a percentage point, bringing it to 5%. The Bank of Canada began its hiking cycle in March 2022, coinciding with the Federal Open Market Committee, and has since raised interest rates nine times, reaching 4.75%.
Market News Summary
Quarterly Results Released by Major Companies
Several major companies have recently released their quarterly results. Here are some notable updates:
- Conagra Brands
- Delta Air Lines
Producer Price Index (PPI) Report by the Bureau of Labor Statistics
The Bureau of Labor Statistics (BLS) has released the latest Producer Price Index (PPI) report for June. According to the report, the PPI is expected to rise by a modest 0.4% compared to the previous year. Meanwhile, the core PPI is projected to increase by 2.5%. These figures indicate a lower growth rate compared to the previous month, which saw gains of 1.1% and 2.8% respectively. The current levels of PPI and core PPI have reached their lowest points since late 2020 and early 2021.
Initial Jobless Claims Update from the Department of Labor
The Department of Labor has reported the initial jobless claims for the week ending July 8. The average number of claims in June stood at 255,000, marking the highest level since late 2021. This rise in jobless claims suggests a potential cooling down of the previously hot labor market.
Upcoming Earnings Season
The second-quarter earnings season is set to begin, with three major banks – Citigroup, JPMorgan Chase, and Wells Fargo – reporting their results. It is anticipated that there will be a decline of 6.8% in S&P 500 earnings compared to the previous year. This would mark the largest drop since the second quarter of 2020, which experienced a significant decline of 31.6%.
Furthermore, companies such as BlackRock, State Street, and UnitedHealth Group will also be announcing their earnings during this period.
Consumer Sentiment Index by the University of Michigan
The University of Michigan is scheduled to release its Consumer Sentiment index for July. Market consensus predicts a reading of 65.8, slightly higher than the previous month. Notably, consumers’ expectations of inflation for the upcoming year were at 3.3% in June – the lowest level observed in over two years.
It is essential to stay updated on these market trends and key indicators.