Housing Stocks Hit By Weaker Than Expected Builder Sentiment

DR Horton, Hovnanian, Home Depot, and Lowe's all lose ground as investors worry about the future of the housing industry.

Feb 18, 2014 at 3:30PM

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

With 30 minutes of trading left in today's session, the Dow Jones Industrial Average (DJINDICES:^DJI) is down seven points, or 0.04%, the S&P 500 if up 0.21%, and the Nasdaq is higher by 0.77%. While Coca-Cola's weak earnings report this morning can be partially blamed for the Dow moving into the red today, the market as a whole is also faced with a much worse than expected homebuilder sentiment report.

The National Association of Home Builders today said its housing market index fell to a reading of 46 in February, down 10 points from January. A reading above 50 indicates that the market is strengthening, so anything below that is not a good sign. The reading was taken from survey responses from 321 builders around the country on how they felt about the housing market. While builders used the weather as one reason for their poor outlook, other reasons given were a shortage of skilled workers, limited land for construction, and delays in obtaining building materials.  

This report is likely one reason shares of some the housing stocks are moving lower today: homebuilders DR Horton (NYSE:DHI)and Hovnanian Enterprises (NYSE:HOV) are respectively down by 1.3% and 1.4%, while home improvement retailers Home Depot (NYSE:HD) and Lowe's (NYSE:LOW) have separately dropped 0.4% and 0.7%.

With shares of the two homebuilders on a tear the last five years (DR Horton up 160.5% and Hovnanian higher by 345.4%, compared against the S&P 500's 133.3% rise during the same time frame) as the housing industry firmed up, a slight pullback now shouldn't hurt investors' confidence. As with any recovery, there are ups and downs along the way, and unfortunately this may just be one of those downs. If you believe we will need more homes in the future, than prices of new homes will likely continue to climb, thus these businesses should continue to profit. One thing to watch for, though, is the builders' issue of finding skilled labor and build-ready land. Should these factors remain challenging, costs may rapidly increase as higher wages will be needed to attract and retain workers; a possible increase to land prices could also certainly hurt margins.

Meanwhile, Home Depot and Lowe's thrive when new homes are being sold, so a slowdown will likely hurt growth rates. Simply put, homeowners spend more at these retailers than renters. But as with the homebuilders, investors shouldn't be overly concerned about this single survey report coming up weaker than expected. This is the first sentiment report to fall below 50 since May 2013, so as of right now this is not yet a trend, but rather perhaps just a one-time occurrence due to mainly the weather. If the index continues to fall below the 50 mark, and we see a true shift in the housing market, then investors should consider taking a deeper look at the retailers and determine whether to continue holding or sell.

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Matt Thalman owns shares of Home Depot. The Motley Fool recommends Home Depot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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