Please ensure Javascript is enabled for purposes of website accessibility

Housing Stocks Hit By Weaker Than Expected Builder Sentiment

By Matt Thalman – Feb 18, 2014 at 2:30PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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

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 (^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 (DHI 4.31%)and Hovnanian Enterprises (HOV 12.24%) are respectively down by 1.3% and 1.4%, while home improvement retailers Home Depot (HD 2.07%) and Lowe's (LOW 1.80%) 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.

Looking for the next BIG thing, Look no further


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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
$29,490.89 (%)
The Home Depot, Inc. Stock Quote
The Home Depot, Inc.
$289.56 (2.07%) $5.86
D.R. Horton, Inc. Stock Quote
D.R. Horton, Inc.
$73.79 (4.31%) $3.05
Hovnanian Enterprises, Inc. Stock Quote
Hovnanian Enterprises, Inc.
$41.80 (12.24%) $4.56
Lowe's Companies, Inc. Stock Quote
Lowe's Companies, Inc.
$197.42 (1.80%) $3.50

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/05/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.