Housing stocks, which include home improvement players, building supply companies, and home builders like DR Horton and Pulte Group, have gained about 16% year-to-date, outperforming the S&P 500. The US housing market has shown signs of cooling off, with high mortgage rates and elevated home prices impacting demand. In June, sales of new single-family homes dropped 0.6% to a seven-month low of 617,000 units. Prices for new homes have remained flat at $417,300, with the average 30-year fixed mortgage rate at 6.8%.
DHI stock has seen strong gains of 150% since early 2021, outperforming the broader market over the past three years. The Trefis High Quality Portfolio, consisting of 30 stocks, has also outperformed the S&P 500 each year over the same period. Companies in the housing sector may benefit from the Federal Reserve considering an interest rate cut, which could bring down mortgage rates and stimulate demand. Additionally, the easing of supply chain constraints and price corrections for construction materials have softened.
Despite uncertainty in the housing market outlook, there remains a fundamental under-supply of homes in the US, providing major housing players with good demand visibility. Financially, most large homebuilders have reported solid performance, with D.R. Horton reporting better than expected earnings in Q3 FY’24. The company also authorized a new $4 billion share repurchase program. Overall, the current uncertain macroeconomic environment, including high oil prices and elevated interest rates, may impact the housing sector’s performance in the near term.
The so-called “lock-in” effect has reduced the supply of existing homes for sale, as current homeowners with lower mortgage rates opt to stay put. However, with rates rising, overall demand is being impacted, with new home sales falling. It is still unclear when the Federal Reserve may implement an interest rate cut, further complicating the outlook for housing stocks. However, the long-term demand for homes in the US, coupled with the potential for lower mortgage rates, could help support the performance of companies like Pulte Group and DR Horton.
In conclusion, the housing market in the US has experienced some cooling off recently, with high mortgage rates and elevated home prices impacting demand. However, the fundamental under-supply of homes in the country may provide major housing players with good demand visibility in the long run. The potential for an interest rate cut by the Federal Reserve could also stimulate demand for homes, benefiting companies in the housing sector. Despite uncertainties in the near-term outlook, companies like D.R. Horton and Pulte Group may see continued solid financial performance, supported by the overall demand for housing in the US.
