With Inflation Easing A Bit, Are Housing Stocks Worth A Look?

FND: Floor & Decor Holdings logo
FND
Floor & Decor Holdings

Our theme of Housing Stocks, which includes the stocks of home builders, building products companies, and home improvement players, has risen by about 2% over the last month, marginally underperforming the S&P 500 which remains up by 4% over the same period. The theme also remains down by about 29% year-to-date, lagging the S&P 500, which remains down by about 14% over the same period.

Now, the signs from the housing market have been mixed of late. Inventory is apparently tight and pricing trends in the housing market remain robust. The median listing price for homes in July stood at $449,000, up 13% compared to last year, per Realtor.com, although it marks a slight decline versus June. However, existing home sales volumes are on the decline and home-building activity is also slowing down. Housing starts, a measure of new home construction activity, fell 2% to a seasonally adjusted annual rate of 1.559 million units for July 2022, the lowest level since last September, as higher mortgage rates and surging raw material costs have made homes less affordable. For perspective, rates on 30-year fixed-rate mortgages in the U.S. have risen by about 200 bps over the last year to 5.1% currently. The biggest decline in activity is coming from the single-family home segment, although activity in the apartment space is still quite strong.

Although it is difficult to time an entry into the theme, we think it may be worth a look at current levels. With inflation for the month of July easing a bit versus June levels, homebuilders could see their input costs ease a bit. Moreover, mortgage rates have also fallen a bit from 5.8% in mid-June to about 5.1% currently and this could make financing a bit cheaper for buyers. Homes remain considerably undersupplied in the U.S. and this means that volumes should pick up as prices ease. Within our theme, Floor and Decor Holdings (NYSE:FND) has been the weakest performer, with its stock declining by about 32% 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 24% year-to-date.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

Returns Aug 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
 FND Return 10% -32% 83%
 S&P 500 Return 0% -13% 85%
 Trefis Multi-Strategy Portfolio -1% -14% 244%

[1] Month-to-date and year-to-date as of 8/25/2022
[2] Cumulative total returns since the end of 2016

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