Home Markets Why DR Horton & Pulte Group Are Underperforming Despite Rate Cuts

Why DR Horton & Pulte Group Are Underperforming Despite Rate Cuts

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Our theme of Housing Stocks, which includes the stocks of home improvement players, building supply companies, and home builders including DR Horton and Pulte Group 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 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?

Although it is difficult to gauge the near-term outlook for the housing 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 in the long run. The easing of supply chain constraints and some price corrections for construction materials, such as lumber following the post-pandemic shortage are also likely to help home builders. Millennials, who have delayed home ownership, may eventually drive stronger sales going forward as they age and start families. Federal support for student loan relief could also increase home ownership by making it more accessible for people previously burdened by debt. The financial performance of most large home builders has remained positive in recent quarters. Pulte Group saw earnings come in at $3.35 per share, up from $2.90 in the year-ago quarter, with home closings rising 12%. Lennar posted earnings of $3.90 per share, beating estimates, with new home orders increasing 5% while deliveries were up 16% year-over-year.

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