uploads///Kansas City Fed

Is it time to rotate out of the West-Coast centric homebuilders?

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Apr. 2 2014, Published 5:32 p.m. ET

The Kansas City Fed Manufacturing Survey is a barometer of economic conditions in the 11th district The survey is put out by the Kansas City Fed and covers a wide range of economic indicators, from general business conditions to new orders, shipments, unfilled orders, delivery times, inventories, prices paid and received, headcount, and average work week. It also asks businesses for their outlook six months out. It focuses on the 10th Federal Reserve District, which includes Kansas, Missouri, Colorado, Oklahoma, Wyoming, and New Mexico. It’s similar to the other Fed Surveys, including the Empire State Manufacturing Survey and the Chicago Fed National Activity Index. Index improves again in March The general business conditions index rose 6 points to +10, the best reading in two years. Pretty much every component of the index rose, and although employment remains barely positive. The indices for prices paid rose, indicating that pricing pressures may be picking up. Prices received did not increase as much, which could be signalling margin pressures going forward if that doesn’t change. Many survey participants noted that the rebound has been driven weather-related weakness in previous months. In other words, this could have been a “catch-up” reading that you shouldn’t read too much into. Implications for homebuilders Overall, the report echoes many of the other Fed reports which show manufacturing is improving overall. It also could mean that we might start seeing the housing recovery spread out from a few areas like California, Texas, the big cities, and Phoenix to places where the recovery has been tepid, particularly in the Midwest. Investors in homebuilders need to take a good look at the geographic exposure of their stocks. Over the last couple of years, the West – Coast centric builders like KB Home (KBH) and Standard Pacific (SPF) have done the best as tight inventory has allowed them to raise prices at will. Most of the builders have been reporting double digit increases in average selling prices. If the Kansas City Fed report is to be believed, and manufacturing activity is picking up in the Midwest, it would be time for investors to look at builders that have exposure to the Midwest, particularly the more diversified builders like D.R. Horton (DHI) and PulteGroup (PHM). Investors who prefer to simply make a directional bet on the sector as a whole should look at the S&P SPDR Homebuilder ETF (XHB).

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