The home-builder stocks have been coming under some selling pressure since the start of April. Many talking heads in the financial media are now calling the sector run as being over. Most traders know that every industry group will experience corrections. That seems to be what is happening with the home-builder stocks at this time. Below I will list three reasons why the home-builder sector can still trade higher after this current correction is over.
1. Home rental prices have increased dramatically over the past several years in the United States. Many people are now thinking that it might be cheaper to own a home instead of renting one. Obviously, property taxes and home-owner insurance are two reasons why renters continue to stay in a rental property, but if rental prices continue to surge the psychology of home-ownership will start to change.
2. Over the past five years many hedge funds and private equity firms have bought a lot of single family homes. Leading private equity firm, The Blackstone Group LP (NYSE:BX) was on a home buying binge until last year. These home purchases by the Blackstone and others institutions have taken a lot of supply off of the market. Many people that are now in the market to buy a home are starting to pay the offering price for a house. This will eventually force potential home buyers to build a home as the supply in the market-place continues to diminish.
3. Another major factor that will keep the home-builder sector intact in the near term is the fact that interest rates are at historical lows. Currently, the rate on a 30-year fixed mortgage is around 3.80 percent. The only problem with the low interest rates is that the banks still are not lending money like they did in the past. When the banks start to ease their current lending standards this will only boost home ownership demand.
Recently, many of the major home-builder stocks such as Lennar Corp (NYSE:LEN), PulteGroup, Inc. (NYSE:PHM), and DR Horton Inc NYSE:DHI) have all declined sharply after reporting earnings. All of the declines in these home-builder stocks should eventually lead to another buying opportunity. Traders that want to follow the entire home-builder stock sector can trade and follow the iShares US Home Construction ETF (NYSEARCA:ITB). At this time the ITB will have major chart support around the $24.00 level. This area should be a major buying opportunity in the home-builder sector.
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