How Will DR Horton & Its Peers Handle A Weakening Housing Market?

Our theme of Housing Stocks, which includes the stocks of home improvement players, building supply companies, and home builders including DR Horton (NYSE:DHI) and  Pulte Group (NYSE:PHM) has gained about 16% year-to-date. This compares to the S&P 500, which has gained almost 15% over the same period. There are signs that the U.S. housing market has been cooling off considerably of late after seeing strong gains through the Covid pandemic.

Home builders have benefited from the so-called “lock-in” effect, which reduced the supply of existing homes for sale as current homeowners, who locked-in mortgages at lower rates, stay put in their homes. Redfin estimated back in January that about 90% of U.S. homeowners had a mortgage rate below 6%, which is well below the current rate.  That said, with rates higher, it appears that overall demand is being impacted, with new home sales also falling.

In June, sales of new single-family homes in the U.S. dropped 0.6% sequentially to a seven-month low of 617,000 units as high mortgage rates and elevated home prices impacted demand. Sales were down 7.4% year-over-year. Prices for new homes have remained roughly flat at $417,300 compared to a year ago. The average 30-year fixed mortgage rate in the U.S. stands at about 6.8% currently, up from about 6.6% in early January as concerns about inflation caused the markets to expect the Fed to leave benchmark interest rates high. Things have been mixed for existing home sales – which account for a bulk of the U.S. housing market – which fell by 5.4% in June.

DHI stock has seen extremely strong gains of 150% from levels of $70 in early January 2021 to around $175 now, vs. an increase of about 45% for the S&P 500 over this roughly 3-year period. Admirably, DHI stock has outperformed the broader market in each of the last 3 years. Returns for the stock were 57% in 2021, -18% in 2022, and 70% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023. 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 DHI see a strong jump?