Homebuilders on a tear

One of the many market success stories of last year was the continued stabilization of housing and the resurgence of homebuilding stocks, many of which—D.R. Horton (DHI), KB Home (KBH), LGI Homes (LGIH), NVR, Inc. (NVR), and Toll Brothers (TOL)—are currently trading near long-term or all-time highs after top-shelf 2017s.

Lennar (LEN), which is scheduled to release earnings tomorrow, was typical in many respects. It gained 50% on the year—31% in a red-hot burst from September 7 to December 22. And those gains came despite a sharp retracement in early November amid reports that the GOP tax reform bill would hurt the housing market by, among other things, cutting the popular mortgage-interest deduction.1

Lennar Corp. (LEN), 8/31/17 – 1/8/18

Source: OptionsHouse

Industry groups cried foul, with the National Association of Home Builders claiming it was “worried about a national housing recession.”2 Len, which had hit $57.95 on October 25, tumbled nearly 8% over the next seven days.

But for the most part homebuilding stocks quickly shrugged off the news, powering into the end of 2017 and following through early this year with even more enthusiasm—LEN, for example, jumped 7% the first week of the year, topping its previous all-time high (from 2005) of $67.38 in the process.

Lennar Corp. (LEN), 12/2/01 – 1/4/18

Source: OptionsHouse

Last year’s housing numbers were relatively strong, although there were some bumps along the road. Monthly existing home sale numbers, for example, mostly contracted from June-September, but seemed to get back on track with a best-of-the-year reading (5.8 million) for November.3

But some housing analysts argued the positive industry sentiment was being built atop a shaky foundation—among other factors, that bullish-looking higher home prices were really a reflection of undersupply and buyer competition at the lower end of the housing market, while the upper third of the market was oversaturated and slack.4

LEN has had very few earnings misses in recent years,5 but its stock has had a tendency to rally a bit before releasing its numbers and pull back in the short-term after. Over its past 28 earnings announcements (dating back to 2011):

●LEN tended to gain ground (overall) in the four days leading up to earnings.

●It closed higher on earnings day 54% of the time.

●The stock had a negative median return the day after earnings, closing lower 60% of the time.

●After five days the stock’s median return was -1.3%, and the stock was lower than its close on earnings day 54% of the time.

And longer-term? Well, the latest batch of housing data will hit the market between January 17 and January 22. And as earnings seasons unfolds, we’ll begin to see where some of the housing-market rubber meets the homebuilding road.

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1 CNN.com. Homebuilder stocks rocked by tax reform plan. 11/2/17.

2 Business Insider. The GOP tax plan has the real-estate industry in a panic and talking about housing recessions. 11/2/17.

3 National Association of Realtors. Existing-Home Sales (data through November 2017).

4 CNBC.com. Stop sugarcoating the housing market: Economist warns that buyers face increasing troubles. 9/26/17.

5 StreetInsider. Lennar Corp. (LEN) Earnings. 1/8/18.