Why Homebuilder Stocks Are Outperforming Despite A Tough Housing Market

Our theme of Housing Stocks, which includes the stocks of home builders, building products companies, and home improvement players, has fared relatively well thus far in 2023, rising by about 16% year-to-date. This compares to the S&P 500 which remains up by about 6% over the same period.

Now, recent signs from the housing market have actually been tough as surging raw material prices and rising mortgage rates hit housing sector stocks over 2022. New home sales for January 2023 stood at a seasonally adjusted annual rate of 670,000 down 19.4 percent below the January 2022 estimate of 831,000. Housing prices have also cooled a bit, with the median sales price of new houses sold in January 2023 falling almost 1% year-over-year to $427,500. Housing starts, a measure of new construction activity, declined 4.3% month over month in January for single-family housing which accounts for the bulk of homebuilding. However, the worst may be over for the housing market, as there are multiple positive developments for the sector as well.

Firstly, inflation appears to be clearly easing. For January, retail inflation fell to 6.4% compared to 7.5% in the year-ago period.  This gives the U.S. Fed the confidence to ease the pace of its interest rate hikes. The most recent hike rate stood at 0.25%, down from multiple rate hikes of 0.75% last year. The average 30-year fixed rate mortgage in the U.S. stood at about 6.6% in 2022, down from November highs of about 7.1%. This could make financing new homes a bit cheaper. There also remains a fundamental undersupply of homes, with a wide range of estimates projecting that the country may be short of anywhere between 1.5 million to 5 million homes. ^[1] This might indicate that housing players may still have pretty good demand visibility, with volumes and revenues likely to eventually rebound as the economy picks up and as inflation eases.

Within our theme, Installed Building Products (NYSE:IBP) has been the strongest performer with its stock rising by about 34% year-to-date. On the other side, Home Depot stock (NYSE:HD) has been the worst performer declining by about 6% year-to-date.