The seemingly unstoppable rally in homebuilding stocks may face a few potential roadblocks ahead.
In recent months, the group has been notching record after record, posting their best first half in almost a decade. Homebuilders even rose during the pandemic, stumbling just briefly in 2022, before regaining traction. The cohort is also outperforming the broader market — up more than 50% year-to-date versus the S&P 500′s 17% gain.
Still, analysts warn to watch for factors that could threaten the sector’s growth.
“Builders are in the business of building shelter capacity,” said Carl Reichardt, a homebuilders analyst a BTIG. “Shelter capacity right now is very low. So the headwind to the group is if shelter capacity that isn’t bought by the homebuilders increases.”
So far, new homes being built by companies like D.R. Horton Inc. and Lennar Corp. have been snatched up by buyers. The activity has helped drive up each firm’s shares by more than 40% year-to-date.
However, their fortunes could diminish somewhat if dynamics in the existing home market shift, according to Reichardt, who adds that a drop in rental prices could entice potential homebuyers into short-term leases instead of splurging on new houses.
A dip in interest rates could also disrupt housing market dynamics, he noted. The Federal Reserve’s aggressive monetary policy tightening campaign has dissuaded homeowners from moving, leading prospective buyers to seek new homes. That’s sent existing-home sales lower in nearly every month since the start of last year.
Rates Mystery
Eventually, the central bank will start to cut rates. While the timeline of that easing remains unclear, a decline in borrowing costs could reinvigorate existing homeowners to place their homes back on the market, introducing more inventory.
“Ironically, if rates went significantly lower from here, it could juice demand a little bit, but you also might have a lot of competition coming in from the resale side of things,” Oppenheimer & Co. analyst Tyler Batory said.
Some builders, including D.R. Horton and KB Home, target first-time homebuyers who would feel the effects of any financial burden. While the US labor market has remained resilient, a wave of layoffs could dent the number of homebuyers, according to Batory. Additionally, the resumption of student loan payments might leave consumers with less cash on hand for big purchases like a house, he said.
According to a report from Redfin last month, first-time homebuyers need to earn 13% more than a year ago to afford the average US starter home. Another report from the real estate brokerage showed that the average US homebuyer’s monthly mortgage payment is up almost 20% from a year ago as rates remain elevated.
Investors are being vigilant by seeking protection against declines in the group. Based on open interest, SPDR S&P Homebuilders ETF and iShares U.S. Home Construction ETF have the first- and third-largest put-to-call ratios, respectively, among exchange-traded funds with active options trading, according to data compiled by Bloomberg.
Of course, there’s always risks, said Batory, but all things considered, “It’s going to be fine. I think you have a multi-year earnings growth story.”
— Norah Mulinda and Carly Wanna for Bloomberg with assistance from David Marino.
This post was originally published on this site be sure to check out more of their content.
