The housing sector has shown a strong performance this year, with stocks of home builders, home improvement companies, and building supply firms experiencing a significant upswing. Notably, the Pulte Group and Lennar (NYSE:LEN) LEN have seen their stocks surge by 40% year-to-date in 2023, outpacing the S&P 500’s growth of 17% during the same period.
This comes despite soaring mortgage rates driven by the Federal Reserve’s hawkish stance. As of late August, the average rate for a 30-year fixed loan hit over 7.2%, marking the highest level in over two decades. However, this rate has slightly decreased to 7.12%, making home financing more expensive compared to pre-pandemic levels.
Despite high mortgage rates, demand for new homes continues to be strong. U.S. Census Bureau data shows that in July, the total number of new single-family homes sold was at a seasonally adjusted annual rate of 714,000 units, representing an increase of approximately 31% compared to last year’s figures. New homebuilding activity is also on an upward trend, with single-family housing starts increasing by 6.7% to a seasonally adjusted annual rate of 983,000 units in July.
While the median price of new homes in July was $436,700, down from $478,200 in July 2022, indicating some market cooling, supply chain challenges are easing in the housing sector. This is potentially aiding builders by reducing input costs and prices.
However, inflation remains a concern as retail inflation rose marginally to 3.7% in August, although this rate is substantially lower than levels recorded last year.
The Sharpe Ratio, a measure of return per unit of risk, reflects the performance of housing stocks. Since early 2017, PHM stock has had a Sharpe Ratio of 0.7, outperforming the S&P 500 Index’s ratio of 0.6 during the same period.
The housing market is also grappling with a significant undersupply issue. Estimates suggest that the U.S. may have a shortage of anywhere between 1.5 million to 5 million homes. This shortfall could ensure sustained demand, potentially bolstering volumes and revenues for housing sector players.
Among housing stocks, the Pulte Group has been a standout performer with its stock rising by about 69% year-to-date. However, Home Depot (NYSE: HD) has lagged behind, with its stock only increasing by 3% year-to-date.