Why Surging Mortgage Rates Aren’t Denting Homebuilders Like Pulte Group Stock

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 40% year-to-date. This compares to the S&P 500 which remains up by about 17% over the same period. Mortgage rates in the U.S. have actually soared to the highest level in over twenty years, due to the Fed’s hawkish stance. The average rate for a 30-year, fixed loan stood at over 7.2% in late August although it has come down a bit at 7.12% presently. This is making home financing much more expensive compared to the pre-pandemic era. That being said, the market for new homes remains strong.

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.

The total number of new single-family homes sold for the month of July, the most recent data reported by the U.S. Census Bureau, stood at a seasonally adjusted annual rate of 714,000 units, up about 31% versus last year’s number. Prices have also cooled a bit, with the median price of new homes standing at $436,700 for the month, well below the $478,200 seen in July 2022. New homebuilding activity is also ramping up with single-family housing starts to rise 6.7% to a seasonally adjusted annual rate of 983,000 units for July. Data for August is due shortly. Supply chain challenges are also easing for the housing sector, potentially helping input costs and prices for builders. That said, retail inflation edged a bit higher in August, standing at 3.7% although it remains well below levels seen last year.

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 69% year-to-date. On the other side, Home Depot has been the worst performer, with its stock up just 3% year-to-date.