What happened
Shares of residential real estate developers NVR (NVR -0.10%), D.R. Horton (DHI -0.73%), and Meritage Homes (MTH 0.44%) tumbled more than 25% in March, according to data provided by S&P Global Market Intelligence. NVR, the parent company of Ryan Homes, saw its shares drop by 29.9%, while shares of D.R. Horton, the largest homebuilder in the U.S. by number of units sold, fell 36.2%. Meritage's stock was the worst performer of the three, falling 42.5% for the month.
These performances, while much worse than the S&P 500's drop of just 12.5%, were par for the course for the homebuilding sector. The S&P Homebuilders Select Industry Index dropped 38.4% for the month. All three have rebounded along with the broader stock market so far in April, but are still down between 25% and 35% for the year.
Image source: Getty Images.
So what
Like many stocks across many sectors, shares of homebuilders began a serious slide on March 10, as worries about the coronavirus' effect on the U.S. economy grew more pronounced. The fears came in spite of positive news from the real estate sector.
January and February had been banner months for the industry. That's unusual, since home sales tend to slow down in the winter months. But a number of companies posted better-than-expected sales numbers as a result of relatively warm weather. Mortgage rates had been steadily moving lower, sparking interest from potential first-time buyers.
But after the stock market's big sell-offs during the second week in March, both buyers and sellers were starting to get nervous. A study by the National Association of Realtors showed that more than one-third of Realtors surveyed reported sellers considering pulling their homes off the market, and nearly half reported a decrease in interest among buyers.
That's hardly surprising. When the Dow Jones Industrial Average experiences its worst one-day point drop in history, potential buyers are going to worry about the impact on their savings. When layoffs start happening, as they did in March, those affected are going to put their big-ticket purchases on hold. Sellers know this, and also know that if demand dries up, they won't be able to get as much for their home as they planned, which is why they may consider pulling it off the market. Wall Street also knows this, and dumped shares of residential homebuilders -- which, of course, can't just pull their homes off the market and wait.
Another problem for homebuilders like NVR is that although the process of buying and selling a home can be partly done remotely (in fact, the entire thing could conceivably occur online and through the mail), it is usually handled in person. Real estate agents meet with clients to talk through their needs and to show them properties. Prospective buyers walk through model homes or homes for sale. Many buyers want to talk to potential neighbors, or walk around the block a bit.
But the number of Americans under stay-at-home orders from their state governments steadily increased throughout the month of March. By March 31, more than two-thirds of all Americans were being told to stay inside. That number has since increased to more than 90%. That doesn't bode well for the all-important spring buying season.
Beyond touting virtual tours of their available home options on their websites and offering to set up remote meetings with prospective buyers, there was little the industry could do to keep things moving.
Now what
The handful of homebuilders that have reported earnings for January and February posted impressive numbers, as you might expect. But they also indicated in their comments that March was likely to be brutal, and that they had no idea what to expect for the rest of the year. A lot depends now on how quickly things get back to normal.
That, in turn, is going to depend on how soon the coronavirus pandemic peaks and then recedes, whether an effective treatment becomes available, whether there's a second wave of infections, and how soon a vaccine can be developed. Right now, nobody knows the answers to these questions. And until there's more clarity, investors may want to stay away from not just NVR, D.R. Horton, and Meritage Homes, but this entire sector as well. A better bet would be to focus on stocks that have clearer pathways to outperformance.
