
By all accounts, 2024 was an incredible year for the stock market. The S&P 500 improved 24% in the year, set nearly 60 record highs, and experienced low volatility with outsized returns. For the first seven months of 2024, home builder stocks followed a similar trajectory. However, they began to decline in the final five months of the year.
By year’s end, the SPDR S&P Homebuilders ETF returned 9.87% in 2024 while the U.S. Home Construction ETF returned 2%, well below the S&P 500. Individual stocks varied widely: shares of Dream Finders Homes and LGI Homes were down more than 30% while stocks for Toll Brothers and NVR posted greater than 15% returns.
The downturn of stock performance for home builders in the latter months of 2024 was in part due to the unexpected stickiness of mortgage interest rates following the Federal Reserve’s rate cuts. Alan Ratner, managing director for Zelman & Associates, says there was optimism that as the Fed began to cut rates, mortgage rates would move down, and home builders would regain some pricing power and ease margin pressure.
“The rally of the stocks in the first half of the year was in anticipation of the Fed beginning to cut rates in the back half of the year,” Ratner says. “Then when they did cut rates in September, the mortgage market reacted in the opposite way because there was concern that inflation was going to reaccelerate again. As a result, even though the Fed was cutting rates, mortgage rates began to move up and we saw a more challenging market overall.”
Lou Whiteman, contributing writer and analyst at The Motley Fool, says inflation and higher rates ate into the housing sector in the latter half of 2024. As a result, the economy entered 2025 with questions about whether a soft landing could be achieved; such economic concerns likely impacted would-be buyers and contributed to rising levels of pent-up demand, according to Whiteman.
In addition to rates and inflation concerns, Carl Reichardt, managing director of research and home building analyst for BTIG, says choppiness, uncertainty, and volatility in order patterns for home builders in the back third of the year also impacted stock performance. Volatile orders impacted builders’ ability to raise prices consistently, which in turn impacted operating margins.
“There was a lot of worry about margins,” Reichardt says. “There are concerns that as long as builders have to continue to offer interest rate buydowns to get their consumer to purchase a house, we will see a decline in margins into 2025. That outlook is not particularly good for stocks.”
For Reichardt, margins, rates, and the strength of the spring selling season will play a significant role in how home builder stocks behave in 2025.
“[Right now], investors don’t have much of a read on spring. But I think their perspective is interest rates aren’t going anywhere,” Reichardt says. “Therefore, that means builders are going to have to keep their incentives in place to sell houses and that means that it is unlikely margins can go up [in 2025], especially because land costs will go up.”
Ratner says an important short-term data point to track for public builders is order volumes.
“Right now, we are seeing healthy order activity, but maybe a little weaker than what you would see for this time of year. That doesn’t seem to support a reacceleration in price appreciation,” Ratner says. “But whatever begins to happen over the next month or so as the spring selling season gets under way is going to determine how these stocks do for the remainder of the year."
From an investor’s perspective, Reichardt believes they will be looking for builders to regain pricing power to raise and keep prices higher through the spring selling season.
“A decline in actual mortgage rates would mean builder buydowns would cost less. If the buydown costs less, that’s good for margin,” Reichardt says. “Investors would want to see that, [but] I don’t think they are going to see that in the fourth quarter results as they get reported. I think there is a lot of skepticism from the buy side and a lot of skepticism on the sell side that we are going to get an improvement in the interest rate environment and therefore the margin environment for builders.”
He says margins remain the biggest challenge for investors as they try to determine where “the bottom” is for home builders. In a pre-COVID environment, operating margins for home builders typically averaged 10%. The year after COVID, margins increased and 18% become normal. Operating margins have since come down to the 13% range, but Reichardt says there is uncertainty whether they will recede further toward the historical norm.
“The worry about margins in 2025 hurt the stocks at the end of 2024,” he says. “That continues to be an uncertain element here.”
Stock Trends in 2024
Whiteman notes the strong returns of builders such as Toll Brothers (up 23.5% total return in 2024) and NVR (up 16.8%) in contrast to builders such as Dream Finders (down 34.5% in 2024) and LGI Homes (down 32.8%) paints a picture of established and luxury builders holding up better in the stock market than companies that appeal more to first-time home buyers.
“With repeat buyers able to roll existing home equity into a purchase, they were more able to proceed with transactions than first-time buyers in a higher interest rate and more expensive environment,” says Whiteman. “This also likely reflects the relative outperformance and strong confidence of higher-income households compared to less-established, lower-income households.”
Reichardt adds that in 2024, investors tended to favor to companies with broader exposure to more price points. Home builders with large core entry-level exposure—including Century Communities, D.R. Horton, Lennar, LGI Homes, and Meritage—posted negative stock returns in 2024.
“We saw better performance relatively speaking out of companies that had more move-up exposure, more active-adult exposure and less core entry-level exposure,” says Reichardt.
In 2025, Whiteman says the stocks of Dream Finders Homes and NVR will be of particular interest. NVR has been “the standard of consistency” in the home building sector while Dream Finders Homes may be poised to bounce back in the calendar year.
“[Dream Finders Homes] has taken on a lot of debt to fuel their growth, and the stock was hit harder than most in 2024,” says Whiteman. “We will hopefully find out in 2025 how much of the stock’s decline was based on macro conditions and how much was based on company-specific operations. If it was macro, there is a real opportunity there for a bounce back.”
Economic Outlook
A big question looming over the housing market is what will activate pent-up demand. Reichardt says there is a sense among industry stakeholders that a lot of demand is waiting on the sideline, but the valve that releases it—likely interest rates—remains uncertain. Whiteman adds there is significant pent-up demand in the Sunbelt and Western markets, but rates will need to stabilize in the coming weeks “for sales to even have a chance to accelerate.”
“If rates were to fall significantly from here, a lot of that potential inventory could get unlocked, putting more existing homes on the market and making the competitive environment less favorable for builders,” Whiteman says. “So, I think builders can do just fine in a market where rates are down from their highs, stable and predictable, but still above levels they were a few years ago.”
If trends from 2024 continue, Whiteman says inventory levels and demographic trends will likely play less of a role on performance. While both remained favorable for much of 2024, other factors—including rates and the health of the consumer—offset inventory and demographic conditions.
“Over the longer term, factors like housing stock and shifting demographics definitely should mean significant demand for new houses, but as an investor it is very hard to know how quickly those trends will play out,” says Whiteman.
In addition to the macro factors that could impact the overall housing outlook, Reichardt says how home builders approach growth in 2025 will be an important element to watch. Many public builders have highlighted community count growth targets during earnings calls and have significant cash on hand, but market conditions may dictate the way builders can grow.
“I think it is going to be pretty unlikely that we see absorptions pick up [in 2025], so growth is going to come from expanded store count. The publics have a lot of market share in the biggest markets, so you are fighting with each other for customers,” Reichardt says. "That then creates more uncertainty for margins. I think different builders are going to approach growth differently; I think we are going to see more builders balance growth with margin, sales pace, and sales price.”