* May New Home Sales disappoint but mortgage rates have improved since then.
* Our 12-18 game plan for Builders FirstSource is unchanged.
As we read through the May New Home Sales report, which missed consensus expectations, we are seeing shares of homebuilding stocks such as Toll Brothers (TOL) , D.R. Horton (DHI) and even our own Builders FirstSource (BLDR) trade off modestly. Some will point to the consumer as one of the reasons for the miss, but we’re in the camp that thinks the spike in 30-year fixed mortgage rates during May was a greater factor.
As we can see in the chart below, over the last few weeks we’ve seen that bellwether mortgage rate retreat as the recent inflation data has warmed the market’s expectation for rate cuts late this year and next year.
It’s important to remember our timing for starting the portfolio’s position in Builders FirstSource in June as mortgage rates improved, but more importantly May inflation data showed renewed progress, improving the prospects for eventual rate cuts by the Fed. More recent data, in the form of the June Flash PMI reports from S&P Global, pointed to that progress continuing. That's constructive but we will want to see upcoming data for June, July, August, and September show even more support. As that happens, we are likely to see confidence in rate cuts build, continuing the downward slope in mortgage rates that emerged in recent weeks. When rate cuts happen, we should see further improvement in mortgage rates, something that would spur fence sitters into the market.
We are also reading and hearing about homebuilders offering concessions in a bid to make housing more affordable. This will weigh on homebuilder margins, but it also suggests they will be looking for ways to trim costs, including the adoption of supplier solutions, like the value add products offered by Builders FirstSource.
It’s that combination — the eventual rebound in the housing market and the rising dollar content per home — that we want to capture with BLDR shares in the portfolio. As you can see that is a game plan spanning several quarters, and as we did yesterday, we will look to build out this portfolio’s position opportunistically.
More Pro Portfolio:
- We Are Adding to This Play on the Housing Market
- Weekly Roundup: Prepare to Be Selective
- We Are Lifting Panic Points for 5 Portfolio Holdings
At the time of publication, TheStreet Pro Portfolio was long BLDR.