DR Horton &  Pulte Group: What’s Happening With Home Builder Stocks?

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 23% year-to-date. This is roughly in line with the S&P 500, which has gained about 22% over the same period. So what are some of the trends driving these stocks at the moment?

Sales of new single-family houses in September 2024 were at a seasonally adjusted annual rate of 738,000 per the U.S. Census Bureau. This is 6.3% above the September 2024 estimate of 694,000 and up about 4% from August figures. Prices for new homes have remained roughly flat at $426,300 compared to a year ago. The gains in new home sales come amidst challenges in the market for existing home sales – which account for a bulk of the U.S. housing market. 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. This has also pushed up existing home prices. Moreover, elevated existing home prices can drive buyers toward new homes, which offer better value with modern features, customization options, and warranties.

The Fed’s recent 50 basis point rate cut in September, lowering the federal funds rate to 4.75% to 5%, has not significantly boosted housing stocks. In fact, major homebuilders like Lennar, DR Horton, and Pulte Group saw their stock prices drop by 7 to 8% over the past month. While the rate cut initially brought 30-year fixed mortgage rates down to around 6.20%, rates have since risen again, reaching 6.50% by the week ending October 24, driven by higher bond yields and strong economic data. Although still below this year’s high of 7.22% in May, these higher rates could dampen home sales in October and this has likely weighed on these stocks. Moreover, the Fed’s commentary indicates that it could continue to cut interest rates further and this could be making some home buyers hold off on purchases. Every percentage point reduction in a mortgage rate makes a big difference for home buyers, translating into hundreds of dollars in monthly savings.

Admirably, PHM stock has generated better returns than the broader market in each of the last 3 years Returns for the stock were 34% in 2021, -19% in 2022, and 129% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is considerably less volatile. And it 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 around rate cuts and multiple wars, could PHM see a strong jump?