What To Expect From Housing Stocks As Mortgage Rates Test 7%

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Floor & Decor Holdings

Our theme of Housing Stocks, which includes the stocks of home builders, building products companies, and home improvement players, has declined by about 12% over the last month (about 21 trading days), underperforming the S&P 500 which has shed about 9% over the same period. The theme also remains down by about 38% year-to-date, lagging behind the S&P 500, which is down by about 24% over the same period.

While the housing market had a stellar 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. As of Monday, the average rate on 30-year fixed mortgages surged to over 6.8%, up from levels of just about 3.1% in early January. This also marks the highest mortgage rate in about 20 years. This will make financing home purchases much more expensive and could result in a softening of demand. Moreover, inflation, supply chain issues, and a tight labor market have also been putting pressure on input costs for homebuilders. Building permits – viewed as an indicator of future construction activity – for the month of August fell to a seasonally adjusted annual rate of 1,517,000, marking a decline of 14% versus the last year. This means that builders are likely working through their backlogs while holding back on new developments.

Now, the near-term outlook for the theme remains challenging. The Fed is likely to continue its path of aggressive rate hikes and this will hurt the broader U.S. economy, which has already seen GDP contract over the last two quarters. 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. The supply-demand mismatch is reflected in housing prices as well. The median price of existing homes in the U.S. rose by 7.7% year-over-year to $389,500 in August, despite the tough economic situation. This might indicate that housing players have considerable demand visibility, with volumes and revenues likely to eventually pick up as the economy stabilizes.

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Within our theme, Floor and Decor Holdings (NYSE:FND) has been the weakest performer, with its stock declining by about 47% 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 32% 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 Sep 2022
MTD [1]
YTD [1]
Total [2]
 FND Return -15% -47% 42%
 S&P 500 Return -8% -23% 63%
 Trefis Multi-Strategy Portfolio -12% -26% 193%

[1] Month-to-date and year-to-date as of 9/27/2022
[2] Cumulative total returns since the end of 2016

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