Exuberant homebuilder rally runs counter to housing market woes

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Homebuilders have been notching record after record, posting their best first half in almost a decade. Despite the housing market woes, builders are in the business of building shelter capacity, which is currently very low. However, if shelter capacity that isn't bought by the homebuilders increases, it could pose a headwind to the group. So far, companies like Lennar Corp. have been snatched up by buyers.

“Builders are in the business of building shelter capacity,” said Carl Reichardt, a homebuilders analyst a BTIG. “Shelter capacity right now is very low. So the headwind to the group is if shelter capacity that isn’t bought by the homebuilders increases.”and Lennar Corp. have been snatched up by buyers. The activity has helped drive up each firm’s shares by more than 40% year-to-date.

A dip in interest rates could also disrupt housing market dynamics, he noted. The Federal Reserve’s aggressive monetary policy tightening campaign has dissuaded homeowners from moving, leading prospective buyers to seek new homes. That’s sent existing-home sales lower in nearly every month since the start of last year.Eventually, the central bank will start to cut rates.

According to a report from Redfin last month, first-time homebuyers need to earn 13% more than a year ago to afford the average US starter home. Another report from the real estate brokerage showed that the average US homebuyer’s monthly mortgage payment is up almost 20% from a year ago as rates remain elevated.

Investors are being vigilant by seeking protection against declines in the group. Based on open interest, SPDR S&P Homebuilders ETF and iShares U.S. Home Construction ETF have the first- and third-largest put-to-call ratios, respectively, among exchange-traded funds with active options trading, according to data compiled by Bloomberg.Of course, there’s always risks, said Batory, but all things considered, “It’s going to be fine. I think you have a multi-year earnings growth story.

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