Combined sales of new and previously-owned homes peaked in late 2017 and flat-lined for the following 18 months. New construction wasn’t making much progress, either, as reported by MarketWatch calling the top of the housing cycle in 2018.
It may now be time to revise that earlier thesis, particularly given a strong seasonal pattern in builder stock prices identified by several analysts.
“We see multiple catalysts for order growth and rising demand,” said Wedbush analyst Jay McCanless on Thursday, upgrading his price targets across the universe of builder stocks he covers.
McCanless thinks housing market conditions are improving for builders – itself a surprising notion so late in any economic cycle that’s showing increasing signs of slowing – but he also sees upside to the coming earnings season.
We’re about to enter what Fundstrat analyst Thomas J. Lee calls the “Golden” six-month stretch. Since 1999, he wrote, builder stocks have generally hit bottom around the end of October and then risen, on average, 18.3% through the end of April, outpacing the S&P 500
But surely this year is different, with home builders up about 25% in the year to date? “Despite this, we still think this seasonal ‘Golden 6M’ will play out,” Lee wrote. “In 2012, for instance, Homebuilders were already up 35% but during that ‘Golden 6M’ managed to gain another 18%.” Similar dynamics held in 2000 and 2003, he said.
In fact, in the last decade, it’s only failed once, in 2015.
“We are not entirely sure why this strong seasonality exists, but it may have to do with the Spring selling season for housing,” Lee said.