Don’t Expect Outsize Returns From Housing Stocks In 2022

Our theme of Housing Stocks, which includes the stocks of home builders, building products companies, and home improvement players, had a solid 2021, rising by about 45%, compared to the S&P 500 which was up by about 27% over the year. The outperformance was driven by strong demand for larger homes in the suburbs, low mortgage rates, and tight inventory which resulted in surging home prices. For instance, the median price of newly built homes rose by about 19% year-over-year during November. So what does 2022 hold for the housing stocks? Although we don’t expect the theme to deliver outsize returns this year, there are a couple of factors that could benefit housing stocks.

Covid-19 cases in the U.S. are soaring to all-time highs, driven by the spread of the omicron virus variant that is apparently better at evading the immune response provided by vaccines. Considering this, it’s very likely that the remote working and hybrid working trend could continue for the foreseeable future, helping housing demand. Housing prices could also rise further. Per a survey by the National Association of Realtors, housing prices are likely to rise by around 5.7% in 2022. However, mortgage rates are likely to trend higher this year, with the Fed outlining as many as three interest rate hikes, and this could potentially prove to be a headwind for the market.

Within our theme D.R. Horton (DHI), one of the largest homebuilders in terms of volume in the United States, has been the strongest performer, with its stock up by about 59% year-to-date. On the other side, Installed Building Products (IBP), an installation contractor for insulation for residential and commercial projects, has been a relative underperformer, with its stock up by around 29%.

Below you’ll find our previous coverage of the housing stocks theme where you can track our view over time.

[11/22/2021] Installed Building Products, Home Depot: Stocks To Play The Strong Housing Market

Our theme of Housing Stocks which includes the stocks of home builders, building products companies, and home improvement companies, continues to outperform rising by about 45% year-to-date, well ahead of the S&P 500 which has gained about 25% over the same period.

Data from the housing market has been somewhat mixed recently. While the number of new permits issued for future construction rose by 4%, housing starts, which are an indicator of new home building activity, declined 0.7% to a seasonally adjusted annual rate of 1.520 million units in October. The decline is partly due to material shortages and rising prices and constraints in the land and labor markets. However, the demand for housing remains strong, with a severe shortage of previously owned homes on the market resulting in record house price increases. The median sales price of houses sold in the U.S. soared to about $405,000 in Q3 2021, an increase of about 20% versus last year. This should bode well for home builders and building products companies in our theme going forward.

Within our theme, Home Depot (NYSE:HD) has been the strongest performer, with its stock remaining up by about 45% year-to-date. On the other side, Installed Building Products (NYSE:IBP), an installation contractor for insulation for residential and commercial projects, has been among the weaker performers in the theme, rising by about 35% year-to-date.

[10/14/2021] Housing Stocks Are Worth A Look Despite Mixed Building Data

Our theme of Housing Stocks which includes the stocks of home builders, building products companies, and home improvement companies, continues to outperform rising by about 20% year-to-date, well ahead of the S&P 500 which has gained about 16% over the same period. However, the theme is down by about 7% since our last update in late August.

Data from the housing market has been somewhat mixed recently. Overall housing starts, which are an indicator of U.S. new home building activity, advanced 3.9% to a rate of 1.615 million units in August. However, single-family starts, which represent the largest segment of the market, declined 2.8% to a seasonally adjusted rate of 1.076 million units. This is likely due to higher material costs and a shortage of labor. That said, demand is likely to remain robust in the near-to-medium term driven by the strong economy and favorable employment and wage trends. Moreover, mortgage rates remain near multi-year lows, despite marginal increases in recent weeks.

Within our theme, Floor & Decor Holdings (FND), a company that specializes in hard surface floorings and related accessories, has been the strongest performer, with its stock up by about 28% year-to-date. On the other side, Installed Building Products (IBP), an installation contractor for insulation for residential and commercial projects, has been the weakest performer, with its stock up by just about 7% year-to-date.

[8/26/2021] The U.S. Housing Market Is Cooling, But Housing Stocks Are Still Worth Considering

Our theme of Housing Stocks which includes the stocks of home builders, building products companies, and home improvement players, continues to outperform rising by about 30% year-to-date, well ahead of the S&P 500 which has gained about 19% over the same period. The theme has also returned a solid 73% since the end of 2019, versus about 38% for the S&P 500. However, there are some signs that the booming housing market is cooling down.

For instance, housing starts, which are an indicator of U.S. new home building activity, declined by 7% in July compared to June, following two consecutive months of gains, to a seasonally adjusted annual rate of 1.534 million. Moreover, the median prices for existing homes for July also declined by about 1% month-over-month to about $359,900. Inflation pressures for building materials, land, and labor also remain a concern for builders. The number of homes that were authorized for construction but not yet started last month also remained elevated, indicating that builders are somewhat hesitant to execute on new projects.

However, there are a couple of trends that could help the market in the longer run.  Daily Covid-19 cases have surged by over 2.5x over the past month due to the spread of the highly infectious Delta variant and this is likely to delay return to office plans for many companies. The recent Covid surge comes despite strong vaccination rates across the U.S. and is likely a sign that Covid-19 could linger. This should bode well for the work-from-home trend and drive demand for more spacious homes. Moreover, there appears to be a shift in home buying, as well, with millennials  – who are the largest generational group in the U.S. – increasingly interested in purchasing homes. This could drive homes sales in the years to come.

While the stocks in our theme have outperformed, Lennar (LEN) has been the strongest performer, rising 42% year-to-date. On the other side, Home Depot (HD) has been the weakest performer, with its stock up by 22% year-to-date.

[7/26/2021] Do Strong Earnings And Growing Construction Activity Make Housing Stocks A Buy?

Our theme of Housing Stocks which includes the stocks of home builders, building products companies, and home improvement players, continues to fare well, rising by about 27% year-to-date, well ahead of the S&P 500 which has gained about 17% over the same period.

While the outperformance comes on the back of a surge in demand for more spacious homes in the suburbs through Covid-19 and low mortgage rates, there have been some other recent positive developments for the industry. Last week, D.R. Horton, one of the largest homebuilders published a stronger-than-expected set of Q3 FY’21 earnings, indicating that things were continuing to go well for the sector. While revenues rose by 35.4% year-over-year to $7.3 billion, EPS rose by 78%. Separately, new home construction activity in June also picked up, with the seasonally adjusted annual rate of housing starts up 6.3% from May and by almost 30% compared to last year. That being said, there are concerns as well. With high levels of vaccine coverage, companies could start calling workers back to offices in cities later this year and this could impact demand for homes in the suburbs. Soaring prices are also likely to make homes increasingly out of reach for many people. Moreover, builders have been contending with shortages and surging prices for building materials, land, and labor and this could also put pressure on margins to an extent.

Within our theme D.R. Horton (DHI) has been the strongest performer, with its stock up by about 36% year-to-date. On the other side, Installed Building Products (IBP) has been a relative laggard, with its stock up by 16% year-to-date.

[6/28/2021] Are The Cracks Beginning To Show In The Housing Market?

Our theme of Housing Stocks which includes the stocks of home builders, building products companies, and home improvement players, is up 21% year-to-date, ahead of the S&P 500 which is up by about 15% over the same period. The outperformance comes on the back of a surge in demand for larger homes through the pandemic and rock-bottom mortgage rates. However, there are signs that the market could be cooling off.

Based on data from the U.S. Commerce Department, sales of new single-family homes in the U.S. declined unexpectedly by -5.9% in the month of May, to a seasonally adjusted annual rate of 769,000 units, marking a one-year low. The decline is likely due to rising home prices, driven by somewhat tight supply and rising raw material and labor costs. For perspective, the median new home price in the U.S. is up about 18% year-over-year to about $374,400. Now, new home sales are typically viewed as a leading indicator of the housing market, as they are recorded when contracts are signed. A decline in the number could point to a softening in demand. Moreover, the Fed’s recent indicator that it could raise interest rates sooner than expected is also likely to put the brakes on the rapid growth of the market.

Within our theme, the strongest performing stock this year has been D.R. Horton (DHI), one of the largest homebuilders in terms of volume. The stock is up by roughly 29% year-to-date. On the other side, Floor & Decor Holdings (FND), a specialty retailer of hard surface floorings, has been one of the weakest performers, with its stock up by about 13% year-to-date.

[6/1/2021] Are Housing Stocks Still Worth A Look?

New home sales in the U.S. for the month of April fell by about -5.9% month over month to a seasonally adjusted annual rate of 863,000 units, based on data from the Commerce Department, driven by higher pricing and significant supply constraints. Sales for March were also revised downward to 917,000 units from the previously reported 1.02 million units. However, the fundamentals of the housing market still remain strong. Demand is booming driven by the remote work and learning trend following Covid-19, which is causing people to spend more time at home and also due to lower mortgage rates (the 30-year fixed-rate mortgage dropped below 3% last week) which makes financing homes cheaper. The median price of a new home stood at $372,400 in April, up by about 20% from a year earlier.

A host of companies stand to benefit from the longer-term demand for housing. Our theme of Housing Stocks, which includes the stocks of home builders, building products companies, and home improvement players, is up 26% year-to-date, significantly outperforming the S&P 500 which is up by about 12% over the same period. Within our theme, the strongest performing stock this year has been KB Home (KBH) – a Los Angeles-based home builder that focuses on homes for first-time homebuyers. The stock is up by roughly 40% year-to-date. On the other side, Floor & Decor Holdings (FND), a specialty retailer of hard surface floorings, has been one of the weakest performers, with its stock up by just about 6% year-to-date.

[4/26/2021] Is The Housing Market Getting Too Hot?

Our theme of Housing Stocks, which includes the stocks of home builders, building products companies, and home improvement players, is up 26% thus far in 2021, significantly outperforming the S&P 500 which is up by about 10% over the same period. The U.S. housing market is booming, driven by low mortgage rates and strong demand as more people have the flexibility to work and learn from home following Covid-19. Per data from the Commerce Department, sales of new homes in the U.S. surged by 20.7% in March to a seasonally adjusted annual rate of 1.02 million units, reversing a drop of about 18% in February when severe winter storms impacted sales in many parts of the country. Moreover, prices for existing homes surged 17% in March from a year ago. Within our theme, the strongest performing stock this year has been KB Home (KBH) – a Los Angeles-based home builder that focuses on homes for first-time homebuyers. The stock is up by roughly 46% year-to-date. On the other side, Floor & Decor Holdings (FND), a specialty retailer of hard surface floorings, has been the weakest performer, with its stock up by about 7% year-to-date.

So could this be a sign of a bubble in the housing market? Probably not. The current surge in pricing and activity appears to be driven by a mismatch between housing supply and demand, rather than speculation as was the case during the 2008 housing bubble. That said, there are risks, and home builders face supply-side issues including rising prices for building materials, labor, and land. Moreover, with inflation trending higher, the Federal Reserve could potentially rethink its expansionary monetary policy.

[4/6/2021] Stocks To Play The Booming Housing Market

Our theme of Housing Stocks which includes the stocks of home builders, building products companies, and home improvement players is up 24% so far in 2021, significantly outperforming the S&P 500 which is up by about 7% over the same period. Housing prices have soared with the median home price in the U.S. standing at about $313,000 in February, up by 15.8% year-over-year. There are a couple of factors driving the surge, including higher demand for larger homes and homes in the suburbs as more people have the flexibility to work and learn from home following Covid-19. Mortgage rates also remain very low compared to historical levels (30-year fixed-rate mortgage stood at about 3.2%) although they have increased a bit over the last few weeks, in tandem with higher treasury yields. Housing inventory has also been limited, driven by Covid-19 related slowdown in housing starts, extremely cold weather in the parts of the U.S., and a reluctance by existing homeowners to put homes on sale. Within our theme, the strongest performer this year has been KB Home (KBH) – a Los Angeles-based home builder that focuses on homes for first-time homebuyers. The stock is up by roughly 43% year-to-date. On the other side, Floor & Decor Holdings (FND), a specialty retailer of hard surface floorings, has been the weakest performer with its stock up by just about 6% year-to-date.

[11/16/2020] Housing Stocks 

Our indicative theme of Housing Stocks is up a solid 25% year-to-date, versus 11% for the S&P 500, as the housing market continues to boom, despite surging coronavirus cases. As of Q3, the median price of a single-family home in the U.S. is up 12% from a year ago to $313,500, according to the National Association of Realtors. There are multiple trends driving prices.  Firstly, people are spending more time at home, as they work and learn remotely and this is causing an increase in demand for larger homes and homes in the suburbs. Secondly, the supply of new homes available to buy is also low, likely as the pandemic slowed down construction. More importantly, mortgage rates also remain at around their 50-year lows, with 30-year fixed-rate mortgage rates currently at levels of around 2.8%. ^[1] The strong housing market should bode well for home builders as well as other companies that have direct exposure to the housing market. Below is a bit more about the companies in our Housing Stocks theme.

Installed Building Products (NYSE: IBP) is a company that installs residential and other complementary building products. The stock is up by 41% this year.

D.R. Horton (NYSE: DHI) is the largest homebuilder in terms of volume in the United States, focusing primarily on more entry-level homes. The stock is up by 39% year-to-date.

Lennar (NYSE:LEN) is one of the largest homebuilders in the U.S. in terms of consolidated revenue. The company focuses on segments including first-time, move-up, and active adult homebuyers (typically aged over 55 years). The stock is up by 36% year-to-date.

PulteGroup (NYSE:PHM), a home construction company based in Atlanta is the 3rd largest home construction company in the U.S. based on the number of homes closed. The stock is up by 11% year-to-date.

KB Home (NYSE:KBH), based in Los Angeles, builds homes primarily for first-time homebuyers. The stock is down -1.6% year-to-date.

[7/2/2020] Stocks To Play The Housing Recovery

The U.S. housing market has shown signs of recovery despite the coronavirus pandemic, with demand appearing to outstrip supply with inventory remaining tight. Pending home sales – a measure of signed contracts on existing homes – jumped 44% month over month in May and were down just 5% year-over-year per the National Association of Realtors, while the supply of existing homes was nearly 19% lower year-over-year. ^[1] Sales of newly built homes also rose 13% year-over-year in May. So does the improving demand and tight supply make a case for investing in housing stocks?

While there remain considerable risks – given the uncertain direction of the health crisis and tough unemployment numbers  – we’ve picked 5 stocks with exposure to the housing market  – including D.R. Horton, Lennar, and KB Homes – which could offer upside if the market continues to expand, while providing some level of downside protection if things take a turn for the worse. These companies are reasonably large and well established (market cap over $2 billion), have been seeing steadily expanding demand (consistent 3-year revenue growth) with pricing power also improving (rising operating margins). Moreover, these companies have relatively manageable leverage.

What’s Driving The Housing Market & What Are The Risks?

While the surge in demand is partly due to pent up demand post the lockdowns of April, lower interest rates have also been a big driver. The 30-year mortgage rate is at multi-year lows, currently standing at roughly 3%, versus about 4.8% in 2018, making it cheaper for people to finance homes. Separately, the trend of working remotely could increase demand for larger homes as people look to upsize. People living in cities and more densely populated areas could also choose to move to the suburbs, driving demand for single-family homes. That said, the longer-term picture is still somewhat fluid. Unemployment is still at multi-year highs with economic growth likely to decline by double-digits in Q2 and daily coronavirus cases have also surged to new highs over the past week meaning that the worst of the health crisis may be far from over. This could make people more circumspect about taking on large, long-term commitments such as buying a new home.