Virus, Swooning Markets Put Homebuilders On Shaky Foundation

What will make homebuilders rally?

At first glance, the news that low interest rates have gone, well, almost subterranean, should be wind under the sails of the group – and grist for sales.

We’ll use the S&P’s Homebuilders Index (XHB) as a proxy for the sector. In an already dismal year, the group has outperformed the broader markets to the downside. Year to date, as of this writing, heading into the close on a Friday afternoon, the XHB is off 27 percent for 2020 to date, worse than the nearly 23 percent decline for the S&P. For the trailing 12 months – which takes into account the precipitous decline in the markets over the past several sessions – the homebuilders are down nearly 19 percent versus a decline of about 9.3 percent for the S&P.

At a high level, the declines in markets, no matter where you look, are tied to fears over the coronavirus, both as an emergency and as a drag on the U.S. (and world) economies.

The lows in mortgage rates have come as investors bid up Treasuries, and low rates generally translate into a flurry of homebuying. But this time around, the inventory is low, as estimated by Curbed.com, dropping by double digits year over year as measured by January data.

Low inventory means that higher demand, spurred by lower rates, should lift homebuilders’ fortunes.

But this time around is a bit different. There are some headwinds in place against satisfying that demand, as roughly a third of building products imported to the U.S. come from China, as calculated by Richard Branch, chief economist for Dodge Data & Analytics, and as quoted by Yahoo! Finance. The harder it is to get inputs, the harder it is to make outputs (like houses).

At first glance, the assumption might be that we’re headed to a repeat of the financial crisis when it comes to homebuying and homebuilding. That’s less likely to happen, given the loose credit and less than stringent mortgage lending that went on – not to mention the opaque securitizations that made it hard to know exactly which lenders owned what.

But there are other headwinds gathering, tied to wallets and purses and consumer confidence. Friday afternoon, with the increasing drumbeat of school closings, bans on public events and canceled trips, President Donald Trump declared a national emergency. As consumer confidence is almost certain to dip and markets continue to swoon, it stands to reason that people will look at stock portfolios and hold off on large purchases.

The Washington Post reported this week that there have been hundreds of layoffs this past week, as the virus has started to take a bite into industries beyond the travel sector, at ports and in the restaurant vertical.

“We will definitely see an effect on jobs from the coronavirus, and it could be pretty large in leisure and hospitality,” Julia Pollak, labor economist at ZipRecruiter, said in an interview. “The first thing we’ll see is a reduction in hours. We hear many reports of employers canceling staff everywhere except in healthcare.”

Psychology is a big driver in deciding to take the plunge in making a life change – such as setting down roots, literally. And the foundations to do that seem increasingly shaky.