Homebuilders Theme Returned 77% Last Year. What Does 2024 Hold?

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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 very well last year, rising by about 77%, outperforming the S&P 500, which gained about 25% over the same period. The gains have come despite a mixed economy and soaring mortgage rates, which tested levels of over 7.5% late last year, for 30-year fixed-rate loans, compared to levels of under 3% back in 2021.

Looking at a slightly longer time period, PHM stock has seen extremely strong gains of 135% from levels of $45 in early January 2021 to around $105 now, vs. an increase of about 25% for the S&P 500 over this roughly 3-year period. However, the increase in PHM stock has been far from consistent. Returns for the stock were 33% in 2021, -20% in 2022, and 127% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that PHM 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 HD, 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 PHM 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?

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The market for new homes has been solid for a couple of reasons. Housing demand has outstripped supply post the pandemic. Moreover, high mortgage rates have meant that existing homeowners, who have locked-in mortgages at lower rates, are staying put in their homes, reducing the incentive to sell. This has led to a decrease in the market for both upsizing and downsizing homes, resulting in a shortage of existing homes for sale.

In October, existing home sales dipped by 4.1%, reaching a 13-year low, according to the National Association of Realtors, although the metric rose marginally in November by 0.8%. This trend has proven advantageous for new home builders, as the overall housing market still faces a significant under-supply. Moreover, median sales prices for new homes have declined to $434,700 as of November, down by 6% versus last year, as builders have lowered prices with inflation easing and this could also be stimulating demand.

Although it is difficult to gauge the near-term outlook for the 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. This could help companies such as PulteGroup and Lennar. The Federal Reserve has also paused its rate hikes at its December meeting and indicated that it could carry out three interest rate cuts over 2024. This is also likely to help the housing market at large.
Returns Jan 2024
MTD [1]
2024
YTD [1]
2017-24
Total [2]
 PHM Return 0% 0% 462%
 S&P 500 Return 0% 0% 112%
 Trefis Reinforced Value Portfolio -3% -3% 591%

[1] Month-to-date and year-to-date as of 1/10/2024
[2] Cumulative total returns since the end of 2016

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