HomeMost PopularUnveiling the Potential of Homebuilder Stocks Amidst Dropping Interest Rates

Unveiling the Potential of Homebuilder Stocks Amidst Dropping Interest Rates

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The Sturdy Foundation of Housing Stocks

The realm of housing stocks, an encompassing sphere involving home improvement players, building supply companies, and home builders, has showcased a commendable performance throughout this year, with a growth of about 11% year-to-date. These figures outshine the S&P 500’s ascent of 7% over the corresponding period. Despite a lukewarm showing in holiday quarter earnings by key players such as DR Horton (NYSE:DHI) and Pulte Group (NYSE:PHM), the air among investors brims with optimism as whispers of a softening U.S. interest rate environment echo through the financial realm. This week, Federal Reserve Chairman Jerome Powell peered into the crystal ball, hinting at impending lower benchmark interest rates whilst assuring us that the U.S. economy is far from the edge of a recession. The potential dip in mortgage rates proves to be a boon for the housing market, offering improved housing affordability and reduced monthly mortgage payments in its wake.

The Landscape Post-Pandemic

The aftermath of the pandemic revealed a scenario where housing demand outstripped supply, casting a shadow over the housing market. The prevalence of high mortgage rates among existing homeowners locked in at lower rates has led to a stagnation in the movement of properties, with homeowners opting to remain in their abodes, thus diminishing the incentive to put their homes up for sale. This phenomenon has culminated in a decreased market for both upsizing and downsizing of homes, inciting a shortage of existing homes for sale. Data from the National Association of Realtors for January show a 1.7% decline in existing home sales from the previous year, accompanied by a 5.1% increase in existing home sales prices, settling at $379,100. The trend has notably benefitted fresh home builders, given the persistent undersupply plaguing the housing market. New home sales witnessed a year-over-year upsurge of 1.8% to 661,000 units whilst median sales prices for new homes experienced a gentle descent of around 2% to $420,700 as of December. Builders have responded by adjusting prices downward as inflation eases, potentially catalyzing demand.

Charting the Stock Terrain

DHI stock has emerged as a bright beacon, soaring by a staggering 115% from approximately $70 in early January 2021 to its current standing around $150. This notable ascent dwarfs the S&P 500’s growth of about 35% over a similar three-year timespan. DHI stock has gallantly outstripped the broader market for three consecutive years, recording returns of 57% in 2021, -18% in 2022, and 70% in 2023. In contrast, S&P 500 returns stood at 27% in 2021, -19% in 2022, and 24% in 2023. Interestingly, the feat of consistently outshining the S&P 500 – through thick and thin – has proven to be a Herculean task in recent years for individual stocks across various sectors. The landscape isn’t all bleak, though, as evidenced by the Trefis High Quality (HQ) Portfolio, comprising 30 distinguished stocks, which has outshone the S&P 500 each year over the identical period. The secret to their success? The HQ Portfolio stocks delivering superior returns with lower risks compared to the benchmark index – a less tumultuous economic roller coaster as evidenced by HQ Portfolio performance metrics. Given the prevalent macroeconomic uncertainty overshadowed by soaring oil prices and elevated interest rates, could DHI continue on its path of strength?

Weathering the Storm

Although the immediate future of the housing theme remains shrouded in uncertainty, the fundamental issue of home under-supply in the U.S. ensures major housing players maintain good visibility on demand, with volumes and revenues poised to remain robust. This backdrop sets the stage for companies like PulteGroup and DR Horton to seize the reins and steer through the impending waves of change.

Returns Mar 2024
MTD [1]
2024
YTD [1]
2017-24
Total [2]
Β DHI Return 2% 0% 456%
Β S&P 500 Return 0% 6% 127%
Β TrefisΒ Reinforced Value Portfolio 0% 5% 643%

[1] Returns as of 3/7/2024
[2] Cumulative total returns since the end of 2016

Invest withΒ TrefisΒ Market-Beating Portfolios
See allΒ TrefisΒ Price Estimates

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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