Homebuilders drive into peak season

75% of annual returns are made from November to January

Homebuilders are driving into their peak season, with more than 75% of annual homebuilder returns historically generated in the November-to-January timefame, Keefe, Bruyette & Woods noted in its latest report. 

The main factor behind the uptick in growth is building excitement in advance of the upcoming spring-selling season, where approximately 38% of new home sales are placed.

"The spring selling season is significant as its strength can drive volume and margin performance for the year based on momentum, pricing, and inventory build," the firm said. 

Top homebuilders tend to surpass the market by 1.2% in November, 6.4% in December and 6.9% in January.

Several factors are making the market bullish on builders, Sterne Agee analyst Jay McCanless explained.

Builders are looking at a lack of competitive inventory, and America is going on four years of sustained job growth. The last piece of the puzzle would be looser underwriting standards, McCanless noted.  

In the meantime, McCanless said builders are seeing a slight loosening of lending standards, with FICO thresholds starting to go down a bit. 

Looking at last year, major homebuilder stocks increased 50% from August through January versus 8.5% for the S&P 500.  

Meanwhile, in 2013, homebuilder stocks declined approximately 18% from the rate trough reached on May 3 to September. But, the sector has recovered approximately 4% since then and is up 8% in the last two weeks driven by better-than-expected earnings results.

"We expect volatility to continue given uncertainty surrounding interest rates, the underlying pace of recovery, and the federal budget outlook," KBW said.

"However, it seems plausible to us that the normal seasonal trade will take place again this year pertaining to building anticipation around the spring selling season and the potential impact of new community openings on sector order growth," KBW added.  

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