DR Horton & Other Homebuilder Stocks Are Having A Rough Year. Will Things Get Better?

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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 been a mixed performer this year, rising by just about 4% year-to-date. This compares to the S&P 500, which has gained almost 13% over the same period. There are signs that the U.S. housing market has been cooling off recently.

Although Spring is typically the busiest season of the year for the U.S. housing market, things were mixed for April.  New home sales declined 4.7% to a seasonally adjusted annual rate of 634,000 units in April, per the U.S. Census Bureau. Sales were also down by 7.7% from the last year. Prices for new homes have also risen 3.9% to $433,500 in April compared to a year ago. The decline in sales is likely driven by higher mortgage rates, which have made it more costly to finance home purchases. The average 30-year fixed mortgage rate in the U.S. rose to about 7% 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.

Home builders have previously benefited from the so-called “lock-in” effect, which reduced the supply of existing homes for sale as existing homeowners, who locked-in mortgages at lower rates, stay put in their homes. Redfin estimated that in January 2024, about 90% of U.S. homeowners had a mortgage rate below 6%, which is well below the current rate.  That said, with rates higher, it appears that overall demand is being impacted, with new home sales also falling.

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Now DHI stock has seen extremely strong gains of 100% from levels of $70 in early January 2021 to around $140 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 housing 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 in the long run. The Federal Reserve is also looking at multiple interest rate cuts this year, although the timeline is uncertain, and this should help bring down mortgage rates and further stimulate demand. This could help companies such as PulteGroup and DR Horton. Moreover, the easing of supply chain constraints and some price corrections for construction materials such as lumber have also softened and this could also help home builders.
 Returns Jun 2024
MTD [1]
2024
YTD [1]
2017-24
Total [2]
 DHI Return -5% -8% 413%
 S&P 500 Return 1% 12% 139%
 Trefis Reinforced Value Portfolio 0% 4% 641%

[1] Returns as of 6/9/2024
[2] Cumulative total returns since the end of 2016

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