Homebuilding Stocks Like PulteGroup Are Underperforming This Year On Mixed Earnings. What’s Next?

PHM: PulteGroup logo

Our theme of Housing Stocks, which includes the stocks of home improvement players, building supply companies, and home builders has been a mixed performer this year, remaining roughly flat since early January. This compares to the S&P 500, which has gained about 5% over the same period.  The housing sector has been impacted by high 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. Moreover, holiday quarter earnings from key home-building players such as DR Horton and  Pulte Group (NYSE:PHM) have been mixed and this has also impacted the theme.

That being said, 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. Per the National Association of Realtors in December, existing home sales fell 6.2% from the previous year, with existing home sales prices rising 4.4% from December 2022 to $382,600, marking the sixth consecutive month of year-over-year price increases. This trend has proven advantageous for new home builders, as the overall housing market still faces a significant undersupply. New home sales rose 4.4% year-over-year to 664,000 units. Moreover, median sales prices for new homes have declined to $413,200 as of December, as builders have lowered prices with inflation easing and this could also be stimulating demand.

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 35% 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 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 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?

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 2023 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.
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