As the slowdown in home sales continues through 2023, homebuilders could be facing a tough few months in early 2024 as interest rates remain at multi-year highs and the labor market growth begins to stall.
While sales are falling — largely due to affordability issues given higher interest rates — builders have continued to show growth in construction because of chronic shortages of new housing supply.
“As has been the case throughout this year, limited inventory and low housing affordability continue to hamper home sales,” said NAR Chief Economist Lawrence Yun.
Shares Have Strongly Outperformed The Market
Slowing sales, however, have had little impact on the shares in the sector. DR Horton (NYSE:DHI), the biggest homebuilder on the S&P 500 by market capitalization, is up 44% year to date, while Lennar Corporation (NYSE:LEN), ranked second in market cap, has gained 42% this year.
Two other builders have had outstanding performances this year: Toll Brothers (NYSE:TOL), which operates in the higher-end homes sector where affordability issues are less of a concern, has gained 86%, while PulteGroup (NYSE:PHM) is up 94%.
The SPDR Series Trust SPDR Homebuilders ETF (NYSE:XHB), an exchange-traded fund that tracks homebuilder stocks on the S&P 500 index, has gained 37% since the start of the year.
How has the sector managed such a strong performance in 2023, given the fundamental backdrop?
“Fed actions and broader market forces have combined to push interest rates to 20-year highs, but the fundamental desire for home ownership is strong while the supply of houses remains constrained,” said Ryan Marshall, president and CEO at PulteGroup, which reported growth in nearly all metrics at its third-quarter results presentation.
Supply Chains Remain A Problem
Marshall’s latter point is one reflected throughout the industry: housing starts have failed to keep pace with household growth as the number of households has more than doubled since 1970, according to data from the U.S. Census Bureau.
Housing starts data show that, while the industry responded with a strong rebound in activity at the beginning of 2023, the pace of growth has slowed. The most recent data for the month of October showed housing starts rose 1.9%…