Our theme of Housing Stocks, which includes the stocks of home improvement players, building supply companies, and home builders such as Pulte Group (NYSE:PHM) and Lennar (NYSE:LEN) fared well thus far in 2023, rising by 23% year-to-date. This compares to the S&P 500 which remains up by about 11% over the same period. Mortgage rates in the U.S. have soared to the highest level in over twenty years, due to the Fed’s hawkish stance. The average rate for a 30-year, fixed loan stood at about 7.6% as of last week, compared to levels of under 3% in 2021. This is making home financing much more expensive compared to the pre-pandemic era. That being said, the market for new homes remains strong.
The total number of new single-family homes sold for the month of August, the most recent data reported by the U.S. Census Bureau, stood at a seasonally adjusted annual rate of 675,000, units, up about 6% versus last year’s number. However, it marks a slight decline from the June figures. Prices have also cooled a bit, with the median price of new homes standing at $430,300 for the month, below the $440,300 seen in July 2022. New homebuilding activity has picked up a bit. U.S. single-family homebuilding rebounded, with housing starts rising 7.0% in September, with single-family starts rising 3.2% and multi-family starts soaring 17.1%. Demand for new construction is surging due to the housing shortage and a lack of availability of existing homes. With mortgage rates surging, it is more likely that existing homeowners, who have locked into lower mortgage rates will stay put, given the lower incentive of selling their homes. Supply chain challenges are also easing for the housing sector, potentially helping input costs and prices for builders.
While the broader housing sector has fared well in recent years, LEN stock has shown strong gains of 40% from levels of $75 in early January 2021 to around $105 now, vs. an increase of about 15% for the S&P 500 over this roughly 3-year period. However, the increase in LEN stock has been far from consistent. Returns for the stock were 52% in 2021, -22% in 2022, and 16% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 11% in 2023 (YTD) – indicating that LEN underperformed the S&P in 2022. 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 megacap 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 LEN face a similar situation as it did in 2022 and underperform the S&P over the next 12 months – or will it see a strong jump? While it is difficult to gauge the near-term outlook for the theme, there remains a fundamental undersupply of homes, with a wide range of estimates projecting that the U.S. may be short of anywhere between 1.5 million to 5 million homes.  This might indicate that housing players may still have a good level of demand visibility, with volumes and revenues likely to hold up. This could help companies such as Lennar.
|S&P 500 Return||-1%||11%||90%|
|Trefis Reinforced Value Portfolio||-3%||20%||516%|
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 Month-to-date and year-to-date as of 10/25/2023
 Cumulative total returns since the end of 2016