Stock Market Wrap-Up: Homebuilders Signal Hope for a Recovery

The stock market finally posted a huge gain on Tuesday, bouncing back from its weakness over the past several weeks as investors looked to Washington to help keep the economy moving. Even without a final stimulus bill making it through Congress, market participants seemed content to see it as essentially a done deal. The Dow Jones Industrial Average (^DJI 0.51%), S&P 500 (^GSPC -0.29%), and Nasdaq Composite (^IXIC -1.02%) all saw immense gains on the day.

Today's stock market

Data source: Yahoo! Finance.

Some of the biggest winners on Tuesday matched up with the biggest losers in past sessions, as the hardest hit became the most likely to benefit from a potential recovery. Gains among homebuilder stocks were quite notable, with Toll Brothers (TOL -0.11%) climbing 39% and KB Home (KBH 1.95%) seeing a 38% gain on the day.

Trying to predict the future

By all accounts, the housing market has been strong, and at least until the coronavirus pandemic hit, it looked like there weren't any obvious obstacles to housing continuing to enjoy solid performance. Low interest rates were making homes affordable at all levels, and that was helping different homebuilders with their different target markets.

With its upscale emphasis, Toll Brothers benefited from demand on the luxury end of the business. Meanwhile, KB Home's more-affordable alternatives made it a builder of choice for those of all income levels and housing needs.

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Now that many areas of the country -- including hot real estate markets like San Francisco -- are seeing various levels of lockdown due to the coronavirus, it's anyone's guess what 2020's key spring housing season will look like. Most analysts have anticipated the worst, and that's driven most of the decline in homebuilder stocks thus far. If the response to the pandemic takes months, then builders could lose an entire season -- and that would make it crucial for them to find financing to help bridge the gap until revenue returns to normal levels.

Different business models for building homes

Yet it's a mistake to treat all homebuilders the same, even though most of them saw their shares rise Tuesday. Toll Brothers, for instance, faced challenges even before the outbreak, as its strategic move to try to capture a broader audience of homebuyers ran into some operational problems. As growth in the luxury market has slowed, Toll Brothers joined others trying to capture entry-level homebuyers, but its lack of familiarity with the sorts of projects that appeal to those buyers showed up in its most recent results.

KB Home has a broader scope for its projects, and 2019 saw a rise in deliveries and overall revenue. More than half of its sales in the fourth quarter of 2019 were to first-time homebuyers, and it pointed to the Austin market as a key contributor to its success. Affordably priced homes in the Texas capital were especially popular, although KB Home also expected to raise prices in the coming year before the pandemic hit.

As with airlines, cruise lines are trying to deal with the nearly complete loss of revenue for their business amid the pandemic. Some discussions in Congress have included cruise operators as potential aid recipients, but there's been more of a sense that they might have to find their own long-term solutions.

Even as the stock market jumped today, credit markets remained jumpy, with significant disruptions in the mortgage-backed securities arena causing concern. That's not necessarily going to affect homebuilders directly, but if something happens that keeps homebuyers from getting financing, it could prove problematic for builders. For today, though, optimism won the day, and many hope that housing stocks can lead a recovery from the bear market given their cheap valuations.