Building homes not nearly as good a business as investors think it is, says The Wall Street Journal.
S&P Dow Jones Indices’ broad index of home-building shares has risen 31% this year versus a gain of 8% for the S&P 500. Among the factors behind the rally: On a price-to-book basis, the shares of many home builders looked relatively cheap at the start of the year. Mortgage rates also were edging lower, The Journal reported.
Finally, home builders were seen as a major beneficiary of any corporate tax cut since, as domestically focused companies, their rates tend to be high.
Meanwhile, home builders are facing rising costs that, low rates or not, they will find difficult to pass on to home buyers. As investors wake up to that, the prices of their shares and those of exchange-traded funds such as the iShares U.S. Home Construction ETF ITB 0.06% could drop significantly.
The Journal reported finding workers is a problem that is getting successively worse for builders. Many of the carpenters, framing-crew members and roofers that worked in construction during the housing boom moved on to other work or retired, while memories of the housing bust made it so that fewer young people have been eager to enter those professions. President Donald Trump’s tougher stance on immigration also is cutting into the available pool of labor.
Materials costs are rising, too.
To preserve profit margins, builders could raise prices, but they are already so high that it could prove difficult. The median price for a new home was $315,000 in the second quarter, according to the Commerce Department, which compared with $236,000 five years earlier.
