With Mortgage Rates Topping, Will DR Horton Stock Outperform?

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D.R. Horton

Our theme of Housing Stocks, which includes the stocks of home improvement players, building supply companies, and home builders including DR Horton (NYSE:DHI) and  Pulte Group (NYSE:PHM) has fared reasonably well this year, rising by about 13% year-to-date. This compares to the S&P 500, which has gained about 11% over the same period.

The average 30-year fixed mortgage rate in the U.S. rose to about 7.2% in early May, from about 6.6% in early January as concerns about inflation caused the markets to expect the Fed to leave benchmark interest rates high. High mortgage rates have meant that existing homeowners, who have locked-in mortgages at lower rates, are staying put in their homes, reducing the incentive to sell. This has led to a decrease in the market for both upsizing and downsizing homes, resulting in a shortage of existing homes for sale. Sales of existing homes dipped by 4.3% in March, per the National Association of Realtors, with sales prices reaching $393,500, up 4.8% percent from a year ago.  Per Redfin, roughly 90% of U.S. homeowners have a mortgage rate below 6% as of January, well below the current rate. This trend could be advantageous for new home builders, as the overall housing market still faces a significant undersupply. New home sales rose 8.8% to 693,000 units in March, the most recent data available. Moreover, median sales prices for new homes have declined by about 2% to $430,700, as input material prices have declined and this could also be stimulating demand.

Now DHI stock has seen extremely strong gains of 115% from levels of $70 in early January 2021 to around $150 now, vs. an increase of about 40% for the S&P 500 over this roughly 3-year period. Admirably, DHI stock has outperformed the broader market in each of the last 3 years. Returns for the stock were 57% in 2021, -18% in 2022, and 70% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Consumer Discretionary sector including AMZN, TSLA, and TM, and even for the mega-cap stars GOOG, MSFT, and AAPL. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could DHI see a strong jump?

Although it is difficult to gauge the near-term outlook for the theme, there remains a fundamental under-supply of homes in the United States, and this should give major housing players good demand visibility, with volumes and revenues likely to hold up. The Federal Reserve is also looking at multiple interest rate cuts this year and this should help bring down mortgage rates and further stimulate demand. This could help companies such as PulteGroup and DR Horton.
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