Home builder stocks, this year’s market darlings, have taken a hit as investors worry about the long-term effects that high interest rates will have on public home builders’ profits.
The S&P Homebuilders Select Industry Index is down about 5% through September, the first time in 2023 that the index has ended the month lower than it started. Builders are still outperforming the broader market, however, with the index up 26% this year.
“New-home sales have surprised to the positive throughout 2023 as builders have gained market share in the backdrop of limited resale supply,” says Zonda chief economist Ali Wolf. “Investors are concluding, however, that buyers have a limit. Investors are worried about the sustained 7% interest rate backdrop and the accompanying pullback from home shoppers.”
D.R. Horton, the No. 1 builder on the 2023 Builder 100, is down almost 8% through September, while Lennar is down 3%. Pulte is down almost 7%. All three are up more than 50% on the year, however, far outperforming the broader S&P 500’s 10% gain.
While the outlook for new housing remains strong due to a lack of resale supply, housing starts slid 11% in August to their lowest levels in more than two years. These fractures are spooking investors, chief investment officer at Independent Advisor Alliance Chris Zaccarelli told The Wall Street Journal.
“We’re finally starting to see the reaction that most people had expected, which is [share] prices starting to come down,” he said.
There are other signs of problems for the market that could weigh on stocks. Home buyer affordability declined in August, reflecting high interest rates. According to the Mortgage Bankers Association (MBA), the national median payment applied for by purchase applicants increased to $2,170 in August from $2,162 in July.
“Prospective home buyers’ budgets continue to be impacted by the combination of high home prices and mortgage rates that remain higher than 7%,” says Edward Seiler, MBA’s associate vice president of housing economics and executive director of the Research Institute for Housing America. “If mortgage rates shift lower in 2024 as we anticipate, the combination of rising inventory levels and lower rates should lead to stronger demand for buying a home.”
Still, Carl Reichardt, BTIG managing director and home building analyst, says he expects the market to remain relatively firm for the next year. KB Home, for example, reported a slip in revenue from a year ago in its latest earnings but projected higher-than-expected profits in the coming quarters.
“The current operating environment is uncertain, but we believe remains buoyed by a lack of existing-home inventory,” he says. “We continue to believe new-home sales will rise 5% year over year to 675,000 in 2023 and continue to grow modestly in 2024 at about 4%.”