Are Homebuilder Stocks A Buy As Inflation Eases?

Our theme of Housing Stocks, which includes the stocks of home builders, building products companies, and home improvement players, has declined by about 26{a57a8b399caa4911091be19c47013a92763fdea5dcb0fe03ef6810df8f2f239d} year to date, underperforming the S&P 500 which has declined by about 17{a57a8b399caa4911091be19c47013a92763fdea5dcb0fe03ef6810df8f2f239d} over the same period. While housing stocks had a great run through the Covid-19 pandemic, things have taken a turn for the worse this year, considering high inflation and rising mortgage rates, which make financing home purchases more expensive. The average rate on 30-year fixed mortgages stood at about 6.4{a57a8b399caa4911091be19c47013a92763fdea5dcb0fe03ef6810df8f2f239d} as of last week, up from levels of just about 3.1{a57a8b399caa4911091be19c47013a92763fdea5dcb0fe03ef6810df8f2f239d} at the beginning of 2022. Moreover, inflation, supply chain issues, and a tight labor market have also been putting pressure on input costs for homebuilders, while making homes less affordable for potential buyers. The median price of new homes in the U.S. rose by close to 15{a57a8b399caa4911091be19c47013a92763fdea5dcb0fe03ef6810df8f2f239d} year-over-year to $493,000 in October.  In October, new home sales declined 6{a57a8b399caa4911091be19c47013a92763fdea5dcb0fe03ef6810df8f2f239d} year-over-year to a 632,000 unit seasonally adjusted annual rate. This, in turn, is also putting pressure on new projects. Housing starts, a measure of new construction activity, declined 4.2{a57a8b399caa4911091be19c47013a92763fdea5dcb0fe03ef6810df8f2f239d} month over month in October and by close to 8.8{a57a8b399caa4911091be19c47013a92763fdea5dcb0fe03ef6810df8f2f239d} versus last year.

That said, there have been some positive developments of late. Inflation has eased a bit, with the November number coming in at 7.11{a57a8b399caa4911091be19c47013a92763fdea5dcb0fe03ef6810df8f2f239d}, compared to 7.75{a57a8b399caa4911091be19c47013a92763fdea5dcb0fe03ef6810df8f2f239d} in October and 8.2{a57a8b399caa4911091be19c47013a92763fdea5dcb0fe03ef6810df8f2f239d} in September. Mortgage rates have also eased a bit in recent weeks, falling from 7.1{a57a8b399caa4911091be19c47013a92763fdea5dcb0fe03ef6810df8f2f239d} in early November to 6.3{a57a8b399caa4911091be19c47013a92763fdea5dcb0fe03ef6810df8f2f239d} as of last week. The Fed has also slowed the pace of its rate hikes, announcing a 0.5{a57a8b399caa4911091be19c47013a92763fdea5dcb0fe03ef6810df8f2f239d} hike yesterday, after four straight 0.75{a57a8b399caa4911091be19c47013a92763fdea5dcb0fe03ef6810df8f2f239d} hikes at its most recent meetings. There also remains a fundamental undersupply of homes, with mortgage major Freddie Mac previously estimating that the U.S. is short of 3.8 million housing units. 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 inflation eases.

Within our theme, Floor and Decor Holdings (NYSE:FND) has been the weakest-performing stock declining by about 39{a57a8b399caa4911091be19c47013a92763fdea5dcb0fe03ef6810df8f2f239d} year-to-date. On the other side, DR Horton (NYSE:DHI) has fared a bit better than the other names in the theme, with its stock falling by about 16{a57a8b399caa4911091be19c47013a92763fdea5dcb0fe03ef6810df8f2f239d} year-to-date.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.