Homebuilder stocks are telling us something about the U.S. housing market

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A big theme of 2023 was that the new home market had an advantage over the existing home market. Not only did the existing market have tight inventory, it has also been sticker on the price side with many sellers refusing to budge. That lack of competition, coupled with stubborn sellers, gave builders an edge if they were willing to offer affordability improvements like price cuts or mortgage rate buydowns.

Wall Street took notice right away this year, and homebuilder stocks boomed. Even Warren Buffett’s Berkshire Hathaway piled in.

Among the 10 major U.S. homebuilder stocks tracked by ResiClub, all 10 outperformed the S&P 500 in 2023.

That includes PulteGroup (+128.4% over the past 12 months), Toll Brothers (+106.3%), and KB Home (+98.6%). Those firms all posted stock gains between December 19, 2022 and December 19, 2023 that were far above the +24.8% gain posted by the S&P 500 Index during the same period.

During the Pandemic Housing Boom—a period of seemingly unlimited housing demand—many single-family builders like PulteGroup achieved record profit margins as they jacked up their prices. Those elevated margins gave builders breathing room to reduce margins (i.e. cut price or offer mortgage rate buydowns) in pursuit of “finding the market” once mortgage rates spiked last year.

The interesting part is that most publicly traded homebuilders were able to “find the market” and still maintain elevated margin levels. Of course, that got the attention of Wall Street investors.

Another reason many Wall Street analysts like homebuilders is that many believe the U.S. housing market is underbuilt, particularly in terms of entry-level single-family homes.

"Believe it or not, homebuilders are not very cyclical. I know that sounds crazy,” Chris Verrone, head of technical and macro research at Strategas, said on CNBC in November.

The CNBC anchor then chimed in, asking, "They're [builders] super duper rate sensitive, aren't they?”

Verrone responded by saying: "It's funny. Not how you'd think historically. That relationship has been much more pronounced in the last year or so. But not really when you look at the life of the data set. They [homebuilders] tend to be far more secular. They can go on these big secular ten year runs. I think we're in a secular homebuilder run, and every time they sell them [homebuilder stocks] down to -20% or -30% like we had a few weeks ago, take advantage of it. They're good long-term setups.”

The CNBC anchor then asked, “Just because we don't have enough [housing] supply?”

Verrone responded, saying, “I suspect that's the secular story here.”

ResiClub is on a limited content schedule for the remainder of December, including no content going out Dec. 24-25. We’ll be back to a normal publishing schedule come Jan. 1st.

On Wednesday, ResiClub PRO members got access to the updated Lance Lambert House Price Tracker, which includes metro and county level analysis.