Homebuilder shares soar to new highs on insatiable demand for housing

A construction worker applies trim to the roof of a new home in Foley, Alabama, US, on Wednesday, Dec. 21, 2022. New US home construction continued to decline in November and permits plunged as high borrowing costs paired with widespread inflation eroded housing affordability and demand.

Micah Green/Bloomberg

Homebuilders are capitalizing on a seemingly unquenchable thirst for new housing as buyers struggle with limited inventories and rising mortgage rates. 

The S&P Composite 1500 Homebuilding sector hit a new 52-week intraday high Wednesday, nearing an all-time high set in December 2021 and is trading roughly 27% above its 200-day moving average. The group is the best performer in the index over the past six months and among the leaders this year, outperforming even growth industries, like tech.  

After dropping to a low of more than 40% last year, the recent rally in homebuilders represents a massive rebound from last June’s slump and a testament to what appears to be a gradual recovery in home construction. 

“What we’re seeing, frankly, is the early stages of the Street recognizing that there’s something significant that they underestimated in builders,” Evercore ISI analyst Stephen Kim said in an interview. “Now they’re in the process of revising that.”

U.S. housing has become a tale of two markets: Existing homes and the new homes, Bloomberg Intelligence analyst Drew Reading said. 

While housing demand remains robust, current homeowners are unwilling to sell because many don’t want to lose their existing mortgage rates of less than 4%. Borrowing costs have reached a two-month high, according to the Mortgage Bankers Association.

This provides an opportunity for homebuilders in the new construction market. Orders for the quarter came in 18% ahead of estimates, on average, despite mortgage rates above 7% and regional bank concerns, Barclays analyst Matthew Bouley wrote in a note to clients.

“Looking forward, we forecast accelerating positive order growth for builders through the balance of 2023, and into 2024 with normalizing sales pace,” he wrote.

Builders are now offering incentives to help buyers afford homes. Some are buying down a 6.5% mortgage rate to somewhere between 5% and 5.5%, Reading said. Industry giant D.R. Horton Inc. is buying down rates on about 65% of its sales, the company said at the JPMorgan Homebuilding and Building Products Conference Tuesday. 

D.R. Horton reported better than expected earnings in the latest quarter, signaling that real estate’s key spring selling season is off to a positive start. The stock closed at $112.29 on Wednesday, the highest since its 1992 initial public offering, after falling as low as $28 back in early 2020. 

Peer Toll Brothers Inc. is expected to report quarterly earnings next week.

“With builders able to uniquely leverage mortgage rate buydowns, and buyer urgency mounting as home prices have bottomed (also due to the lack of inventory), we continue to view homebuilders as positioned for further growth recovery,” according to Bouley.

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