Looking at the share price performance for the largest publicly-traded homebuilders (excluding CalAtlantic, which is a product of a recent merger between Standard Pacific and Ryland), the divergence in performance among publicly-traded homebuilders is apparent. Since January 1, 2015, LGI Homes outperformed its peers while Hovnanian Enterprises significantly underperformed the peer group. The high levels of divergence among homebuilders' share price performance is a testament to their various market strategies, their diverse geographic as well as market segment exposures, and their disparate levels of operational excellence. Over the past 14 or so months, homebuilders' share price performance has largely been driven by company-specific and/or segment-specific factors rather than broader macroeconomic trends. This should be viewed as a positive development and as a sign of a healthy market.
While the share prices of only 3 of the 11 homebuilders in our analysis are up since January 1, 2015, the fact that there is substantial divergence among homebuilders' share price performance is a sign in and of itself that the market is not anywhere near crisis mode. During the financial crisis, on the other hand, homebuilder share prices were driven by investors' animal spirits rather than by individual company-specific performance or segment-specific trends. When the crisis hit, there was indiscriminate selling and macroeconomic news drove up correlations between homebuilders.
By analyzing the correlation between the daily change in homebuilders' share prices, we are able to better see that share price performance is driven by more than just "risk-on" and "risk-off" trading. The analysis below also shows that similar peers (e.g. LGI Homes & DR Horton, which target entry-level buyers, or Toll Brothers & Taylor Morrison, which predominantly target the move-up and luxury segments) have higher correlations to each other than they do towards the broader group. Thus, for the management of publicly-traded homebuilders, it is as important as ever to pursue the right strategy and to execute it efficiently.
Data Source: Yahoo! Finance