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Homebuilder stocks have outperformed tech stocks so far this year

Scott Gamm

The homebuilder sector is giving the tech sector a run for its money.

The S&P Homebuilders sector (XHB) is up roughly 23% so far this year, outpacing the S&P 500 Technology sector’s (XLK) 19.8% gain.

There are a few factors behind this trend.

First, trade worries: as Yahoo Finance reported earlier in May, the tech sector derives over 50% of its revenue from overseas. Tech is highly sensitive to trade tensions between the U.S. and China. Over the past month, which saw a sharp escalation in trade tensions given President Trump’s decision to raise tariffs on existing imports from China, the S&P Technology Sector fell over 5%, while the S&P Homebuilders Sector declined only 2%.

In this Wednesday, Feb. 20, 2019, photo a construction crew works on an already sold new home in north Dallas. On Tuesday, March 5, the Commerce Department reports on sales of new homes in December. AP Photo/LM Otero)

Aside from tariff worries hurting the technology sector more than the homebuilder sector, housing has been boosted by falling mortgage rates.

Falling mortgage rates

The average rate on a 30-year fixed mortgage now stands a 4.07%, according to Freddie Mac, a decline of 0.54% year-over-year. Lower mortgage rates make buying a home less expensive.

“The divergence between the homebuilders and technology sectors this year seems to be driven by the combination of U.S.-China trade talks going backwards, especially with the blackballing of Huawei, making tech and telecom investing treacherous right now — and lower rates causing housing names to flourish,” said Art Hogan, chief market strategist at National Securities, in an interview with Yahoo Finance.

Hogan expects the homebuilder outperformance of tech to continue in the near-term amid a strong backdrop for housing, outside of falling mortgage rates.

“Household formation has seen a significant acceleration over the last two years and shows little sign of slowing,” he said. “There are approximately 80 million millennials that are transitioning from renters to owners. That represents some health longer term demand homebuilders.”

Though not everyone agrees.

“Even with the decline in mortgage rates, permits to build single family homes, the purest reflection of housing demand, are at the lowest level since November 2016,” noted Danielle DiMartino Booth, a former Federal Reserve adviser and CEO of Quill Intelligence.

She said the high priced part of the housing market is under extra pressure, given the pullback of the state and local tax deductions in the northeast.

“Homebuilding stocks’ relative outperformance is especially perplexing given luxury homes is where builders have made their fattest profits throughout the near-decade recovery,” she said. “In the case of the high-tax Northeast, single-family permits are just 1,000 shy of 2015 levels. Against the backdrop of weak market fundamentals, it’s likely investors are misguided in their enthusiastic embrace of homebuilding stocks.”

Shares of homebuilder KB Home (KBH) are up 40% year-to-date. Lennar (LEN) shares are up roughly 35% so far this year. These gains have eclipsed the aforementioned broader homebuilder sector rise of 23% year-to-date.

Another possible force behind the homebuilder’s outperformance so far in 2019 centers around a pretty simple phenomenon in investing: What goes down must come up.

The homebuilder sector was deeply bruised in 2018, falling 26.5%, compared to just a 3% decline for the S&P Technology sector.

“The [homebuilders] group has stabilized,” said Stephen Guilfoyle, a former trader based on the floor of the New York Stock Exchange and president of Sarge986, LLC. “[The sector is still] well below the peaks of 18 months ago.”

Scott Gamm is a reporter at Yahoo Finance. Follow him on Twitter @ScottGamm.

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