Strong Data Puts The Homebuilders On Breakout Alert

A Rebound In Single-Family Construction Is On

The November Housing Starts and Building Permits data was just released and I am happy with what I see. Not only is the data positive on a month-over-month and year-over-year basis there are signs of strength within the single-family housing market. What’s best is the strength in single-family housing appears to be sustainable and points to solid gains in revenue and earnings for the Home Builder Industry (XHB).

At the headline level, Building Permits rose 1.4% and Housing Starts 3.2% from the previous month. This is the second month of gains for these figures and extends a near-5-year expansion within the industry. Building Permits are now sitting at a fresh 12.5 year high while the Starts figure is close to setting one. The previous month’s data was revised higher adding strength to the data but even that was not what really got my attention. At the single-family level permits are up 11.1% from the previous year, starts 13.6%, as YOY gains accelerate for a fifth and sixth year.

Home Builders themselves are very happy with the level of activity in the housing market. The NAHB Home Builders Housing Market Index surged five points over the last month to hit a 2-decade high. The surge is driven by solid gains in all three sub-indices. The Current Sales and Traffic figures saw the biggest increases at 7 and 4 points respectively. Even so, the 6 Month Outlook for sales is strong at 79 (50 is expansionary).

The Data Doesn’t Lie, This Trend Has Legs

The data doesn’t lie. Pent up demand and the FOMC’s mid-cycle rate adjustment are fueling a rebound in the housing market. Demand is being driven by a secular trend within the Millennials, they are the largest U.S. demographic by far and forming households at an astounding rate.

The U.S. household formation data virtually always trend up, we are a growing nation, but there was a noticeable acceleration a few years ago. The acceleration of household formation began in 2016 when the first Millennials began turning 35 and has been sustained by their numbers ever since. The acceleration went into overdrive in 2018 when the labor market was nearing full-employment and the FOMC began threatening rate hikes and that acceleration is not over. The last Millennial won’t turn 35 for another 19 or 20 years, this trend has legs.

The Homebuilders Are On Breakout Watch

The Homebuilders ETF (XHB) barely budged following the news but the sector is on breakout watch nonetheless. The trend in the XHB is up and recent price action smacks of bullish consolidation. Both indicators, MACD and stochastic, were able to retreat and reset themselves during the consolidation which is a boon for the bulls. At current levels, the 30-day EMA is providing support and the market is set up for a bullish swing in momentum. There is resistance to break at the $46.50 level but once it breaks a move to the 2018 high of $47.20 is likely. A break above $47.20, what I am really looking for, would be incredibly bullish.

DR Horton Inc (DHI) has already broken out. This stock is trading well above its pre-Housing Bubble high and at a new all-time high. The indicators suggest consolidation is in play at this time so it may be possible to get lower prices, the question is how much lower? The best target for support is at the previous all-time high near $53.30. If this level does not form a solid bounce in prices a move to the short-term EMA is possible.

Pulte Group (PHM) is also trading at new highs and trending strongly. This chart is also showing convergences in MACD that tell me the trend is not over. Resistance is near $40.75 so the trend may not continue immediately. That said, if price action moves above $40.75 and closes there I would be a buyer. Based on the last leg of rally, this stock could advance as much as $9 or nearly 25% over the next 12 months.