Will Homebuilders Like DR Horton & Pulte Group Continue Their Strong Performance This Year?

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 fared reasonably well this year, rising by about 16% year-to-date. This compares to the S&P 500, which has gained about 10% over the same period.

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 Redfin, roughly 90% of U.S. homeowners have a mortgage rate below 6% as of January. This compares to the current mortgage rate of about 6.8% currently for 30-year mortgages. Per the National Association of Realtors in February, existing home sales fell 3.3% from the previous year, with sales prices reaching $384,500, up 5.7% percent from a year ago. This trend is proving advantageous for new home builders, as the overall housing market still faces a significant undersupply. New home sales rose 5.9% year-over-year to 662,000 units. Moreover, median sales prices for new homes have declined by about 7% to $400,500, as builders have lowered prices with inflation easing and this could also be stimulating demand.

PHM stock has seen extremely strong gains of 165% from levels of $45 in early January 2021 to around $120 now, vs. an increase of about 40% 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?