The housing stock market has seen mixed performance this year, rising by just 2% year-to-date, compared to the S&P 500’s 16% gain. Signs indicate that the U.S. housing market is cooling off after strong gains during the Covid-19 pandemic. Sales of new single-family homes in May were below expectations, likely due to higher mortgage rates making it more costly to finance home purchases. Existing home sales have also fallen for the third month in a row, with prices climbing to a new high amid low inventory. Housing starts and building permits have also come in below expectations.
Home builders have benefited from the “lock-in” effect, which reduced the supply of existing homes for sale as homeowners locked in mortgages at lower rates. However, with rates higher, overall demand is being impacted, with new home sales also falling. PHM stock has seen strong gains over the past few years, but has not consistently outperformed the S&P 500. The Trefis High Quality Portfolio, on the other hand, has outperformed the S&P 500 each year over the same period, providing better returns with less risk.
Despite uncertainties in the macroeconomic environment, there remains a fundamental under-supply of homes in the United States, giving major housing players good demand visibility in the long run. The Federal Reserve is considering an interest rate cut this year, which could help bring down mortgage rates and stimulate demand. Easing supply chain constraints and price corrections for construction materials such as lumber could also benefit home builders like PulteGroup and DR Horton.
It is difficult to gauge the near-term outlook for the housing theme, but the fundamental under-supply of homes in the U.S. suggests that major housing players will likely see stable demand in the long run. The potential interest rate cut by the Federal Reserve could help stimulate demand further. Additionally, easing supply chain constraints and price corrections for construction materials could also benefit home builders. Overall, the housing market remains an area of interest for investors, despite its current mixed performance.
