Why Homebuilders Like Lennar And Pulte Group Are Faring Well Despite Surging Mortgage Rates

Our theme of Housing Stocks, which includes the stocks of home improvement players, building supply companies, and home builders such as Pulte Group and LennarLEN fared well thus far in 2023, rising by a solid 42% year-to-date. This compares to the S&P 500 which remains up by about 14% over the same period. So what’s driving the current outperformance?

Interestingly, PHM stock had a Sharpe Ratio of 0.7 since early 2017, which is ahead of 0.6 for the S&P 500 Index over the same period. This compares with the Sharpe of 1.3 for the Trefis Reinforced Value portfolio. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds.

Mortgage rates in the U.S. have actually soared to the highest level in over two decades due to the Fed’s continued hawkish stance. The average rate for a 30-year, fixed loan stood at 7.09%, up from 6.96% last week, per Freddie Mac. This is making home financing much more expensive versus the pre-pandemic era. That being said, the market for new homes remains strong.

The total number of new single-family homes sold for the month of June, the most recent data reported by the U.S. Census Bureau, stood at a seasonally adjusted annual rate of 697,000 units, up about 23% versus last year’s number although this marks a slight decline month over month. Prices have also cooled a bit, with the median price of new homes standing at $415,400 for the month, compared to about $432,700 in the year-ago quarter. New homebuilding activity is also picking up with single-family housing starts rising 6.7% to a seasonally adjusted annual rate of 983,000 units for July. Inflation and supply chain challenges are also easing for the housing sector, potentially helping input costs and prices for builders. Retail inflation in the U.S. rose to just 3.2% for July, slightly below expectations.

There also remains a fundamental undersupply of homes, with a wide range of estimates projecting that the U.S. may be short of anywhere between 1.5 million to 5 million homes. ^[1] This might indicate that housing players may still have a good level of demand visibility, with volumes and revenues likely to hold up.

Within our theme Pulte Group stock has been one of the strongest performers, rising by about 70% year-to-date. On the other side, Home Depot has been the worst performer, with its stock up just 3% year-to-date.