How Is Housing Shaping Up For 2016?

The NAHB Housing Market Index number for March came in at 58 today, slightly below consensus expectations of 59. 

This week, MKM Partners analyst Megan McGrath discussed her cautious outlook for homebuilder stocks. According to McGrath, MKM is now watching for several key developments that could have a major impact on homebuilders in the second half of the year.

“We remain focused on how several potential headwinds could impact 2H16 numbers: 1) labor cost increases, which appear to have eased but we think still bear watching; 2) global market volatility; 3) consumer confidence, which can fluctuate widely, especially in an election year, and 4) any Fed rate decision,” she explains.

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For now, MKM is cautious on homebuilders and intends to fade any rally in the stocks exceeding 10 percent. The firm prefers safer picks in the space, especially large cap stocks.

In MKM’s economic slowdown scenario, the firm estimates about 24 percent downside to homebuilders. However, if the U.S. dips into a mild recession, the firm sees about 42 percent downside.

On the other hand, the firm’s bullish scenario, which it sees as less likely than the slowdown scenario, indicates 29 percent upside to homebuilders in 2016 and 71 percent upside in 2017.

McGrath names CalAtlantic Group Inc CAA, Lennar Corporation LEN and Toll Brothers Inc TOL as the three safest plays.

Disclosure: the author holds no position in the stocks mentioned.