Homebuilders Have Underperformed. Time To Buy?

Our theme of Housing Stocks, which includes the stocks of home builders, building products companies, and home improvement players, has declined by about 30% year to date, underperforming the S&P 500 which has shed about 17% over the same period.

While the housing market had a fantastic run through the Covid-19 pandemic, the current trends don’t look very good. With the Federal Reserve continuing its monetary tightening to fight rising inflation, mortgage rates have been soaring, making financing home purchases much more expensive. As of last week, the average rate on 30-year fixed mortgages surged to over 7%, up from levels of just about 3.1% in early January. Moreover, inflation, supply chain issues, and a tight labor market have also been putting pressure on input costs for homebuilders. Housing prices also remain unaffordable for many people. The median price of new homes in the U.S. rose by close to 14% year-over-year to $470,600 in September, despite the tough economic situation. In September, new home sales declined 11% year-over-year to a 603,000 seasonally adjusted annual rate, while existing-home sales declined 1.4%. Housing starts, a measure of new construction activity, was down by about 8% below the August figure.

Now, the near-term outlook for the housing theme remains challenging. Despite inflation cooling a bit for the month of October, the Federal Reserve is likely to continue its path of rate hikes and this will hurt the broader U.S. economy. This will almost certainly impact the housing market. That said, there remains a fundamental undersupply of homes, with mortgage major Freddie Mac estimating that the U.S. is short of 3.8 million housing units. This might indicate that housing players still have pretty good demand visibility, with volumes and revenues likely to eventually pick up as the economy stabilizes.

Within our theme, Floor and Decor Holdings (NYSE:FND) and Installed Building Products (NYSE:IBP) have been the weakest-performing stocks declining by about 38% year-to-date. On the other side, DR Horton (NYSE:DHI) has fared a bit better than the other names in the theme, with its stock falling by about 20% year-to-date.

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[1] Month-to-date and year-to-date as of 11/16/2022
[2] Cumulative total returns since the end of 2016

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