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Building Interest in Homebuilders

Last week ended on an encouraging note as Retail Sales increased 0.3% during October, versus the expected rise of 0.2%. Apparently the decline in oil prices has begun to trickle its way into consumers’ pockets. And for good reason. An old rule of thumb states that every $10 decrease in the price of oil adds 20-25 basis points to Real GDP.

This week, many of the economic reports scheduled for release will focus on another critical consumer expenditure: Housing. On Nov. 18, the NBHB Housing Market Index is expected to rise to 56 in November from 54 in October, according to Action Economics. On Nov. 19, Housing Starts are seen increasing to 1.030 million annualized units in October from 1.017M units. In addition, Building Permits should advance to 1.040M from 1.031M. Finally on the 20th, Existing Home Sales for October are projected to come in at 5.180M from 5.170M in September.

The slow improvement in housing data has also been encouraging to investors, as seen in the rolling 12-month relative strength chart of the S&P 1500 Homebuilding sub-industry versus the S&P Composite 1500 Index. After trading near its relative lows from November 2013 through May 2014, the group now appears to be gaining upward momentum from continuously encouraging housing data, likely positively influenced by the downward trend in the unemployment rate, as well as the uncertainty surrounding the timing of the initiation of the Fed’s rate tightening cycle.

In addition to a favorable technical trend for the Homebuilders index, S&P Capital IQ equity research has a favorable fundamental outlook. There are 10 stocks in the S&P 1500 Homebuilding sub-industry index, eight of which carry 4- (Buy) or 5-STARS (Strong Buy) recommendations.

So, there you have it. The S&P 1500 Homebuilding Index is showing an improvement in its relative strength trend. What’s more, our fundamental outlook for the overall sub-industry is favorable. Finally, eight of the 10 component companies carry Buy or Strong Buy investment recommendations by S&P Capital IQ equity analysts. These factors may allow this group to record an above-average price performance in the year ahead.

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