HOUSING: The US housing market has seen soaring mortgage rates (see chart) and falling home prices. Yet homebuilder stocks have been some of the best stock performers this year. Limited inventory of existing homes is in turn driving strong demand for new homes and for their homebuilders. Existing home owners are being handcuffed from selling by cheap legacy fixed rate mortgage deals. Whilst demographics and family formation still drive steady first-home demand. This is a market anomaly, as broader indicators from residential REITs (AVB), to infrastructure (PAVE), and lumber prices, have not enjoyed such strength. But the sector has likely seen the worst as interest rates approach peak levels with the economy still very resilient.
BUILDERS: The US homebuilders index has rallied 20% this year, double the S&P 500’s gain, and is similarly up 40% up from its 2022 low. Monthly new home sales are running 25% above the 2022 trough and 5% above the long term average. Whilst available inventory levels are at a year low of 8-months. Average sales prices have fallen towards $420,000 reflecting the weight of first-time buyers in the mix. By contrast existing home sales are down 30% from last year and running 25% below the long term average. The biggest builders like Pulte (PHM) and DR Horton (DHI) have rallied but are still braced for uncertain times, trading for under 10x prospective P/E.
HANDCUFFS: A typical US mortgage carries a fixed rate for 30-years. This has effectively put ‘handcuffs’ on resale supply that typically dominates the residential market 6:1 versus new build. Many are not willing to move house today and lose their cheap legacy mortgage rate. Current average new loan rates are at 6.8% versus the sub-3% levels available as recently as 2021. This makes a monthly mortgage repayment around $3,000 today, assuming 20% down payment and average $500,000 home price. This is 50% higher than the prior sub-3% rates repayment.
All data, figures & charts are valid as of 06/06/2023