Our theme of Housing shares, which includes the shares of home improvement players, building supply companies and home builders, has been mixed this year, remaining roughly flat since early January. This compares to the S&P 500, which gained about 5% during the same period. The housing sector has been hit by high mortgage rates, which tested levels of more than 7.5% at the end of last year for 30-year fixed-rate loans, compared to levels of less than 3% back in 2021. In addition, holiday quarter earnings from key home – construction players like DR Horton and Pulte Group (NYSE:PHM) were mixed and this also affected the issue.
That said, the market for new homes has been solid for a number of reasons. Housing demand has outstripped supply after the pandemic. Additionally, high mortgage rates have meant that existing homeowners who locked in mortgages at lower rates are staying in their homes, reducing the incentive to sell. This has caused a decline in the market for both upsizing and downsizing homes, resulting in a shortage of existing homes for sale. According to the National Association of Realtors in December, existing home sales fell 6.2% from the previous year, with existing sales prices rising 4.4% from December 2022 to $382,600, marking the sixth consecutive month of annual price increases. This trend has proven advantageous for new home builders, as the overall housing market still faces significant undersupply. New home sales rose 4.4% year over year to 664,000 units. Additionally, median sales prices for new homes have declined to $413,200 since December as builders have lowered prices with inflation falling and this could also stimulate demand.
PHM stock has seen extremely strong gains of 135% from levels of $45 in early January 2021 to around $105 now, versus an increase of around 35% for the S&P 500 over this roughly 3-year period. However, the increase in PHM shares was far from consistent. Returns for the stock were 33% in 2021, -20% in 2022, and 127% in 2023. By comparison, returns for the S&P 500 were 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 – it’s been tough over the past few years for individual stocks; for heavyweights in the Consumer Discretionary sector including AMZN, TSLA and TM, and even for the mega-cap 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 every year during the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less roller coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and high interest rates, could PHM face a similar situation as it did in 2022 and underperforms the S&P over the next 12 months – or will it see a sharp jump?
Although it is difficult to assess the near-term perspective for the subject, there remains a fundamental under-supply of homes in the United States, and this should give major residential players good demand visibility, with volumes and incomes likely to hold up. This could help companies like PulteGroup and Lennar. The Federal Reserve also paused its rates at its December 2023 meeting and indicated that it could implement three interest rate cuts during 2024. This is also likely to help the housing market in general.
returns | February 2024 MTD (1) |
From the beginning from 2023 (1) |
2017-24 Total (2) |
PHM Return | -1% | 126% | 460% |
S&P 500 Return | 3% | 30% | 123% |
Hit Enhanced Value Portfolio | 1% | 39% | 614% |
(1) Returns as of 2/8/2024
(2) Cumulative total profit since the end of 2016
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