Our theme of Housing Stocks, which includes the stocks of home builders, building products companies, and home improvement players, has declined by about 38% year-to-date in 2022, considerably underperforming the S&P 500, which remains down by about 20% over the same period. Now the housing market has been very strong over the last two years, with the median listing price for homes in June standing at $450,000, up 17% compared to last year, per Realtor.com, but the tide may be turning.
Mortgage rates have soared, with rates on 30-year fixed mortgages rising from an average of 3.1% in December 2021 to about 5.5% currently, making financing homes more expensive. Rates could trend still higher, with the Fed on track to raise its benchmark rates once again by 0.75% or possibly by even 1% later this month, to fight surging inflation. This could impact demand for homes going forward. Moreover, the Fed’s monetary tightening is very likely to push the U.S. economy into a recession in the coming quarters, and a downturn will almost certainly put pressure on the housing market. Separately, home builder confidence in the U.S. fell to a two-year low in July as rising inflation and supply chain issues have caused several builders to stop construction on homes.
While it is difficult to time an entry into the theme, the fundamentals of the housing market look stronger than during previous downcycles, as homes remain considerably undersupplied in the U.S. With the housing stock theme down by close to 38% this year, it’s looking like a lot of the coming pain is being priced in. Within our theme, Floor and Decor Holdings (NYSE:FND) has been the weakest performer, with its stock declining by about 43% year-to-date. On the other side, Pulte Group (NYSE:PHM), a residential home construction company based in Atlanta, has fared a bit better than the other names in the theme, with its stock falling by about 22% year-to-date.
|S&P 500 Return||1%||-20%||71%|
|Trefis Multi-Strategy Portfolio||3%||-21%||214%|
 Month-to-date and year-to-date as of 7/19/2022
 Cumulative total returns since the end of 2016