Residential real estate stocks: A story of the haves and the have-nots

Today's newsletter is brought to you by Groundfloor!

Groundfloor powers fractional real estate investing for new and experienced investors. We've seen 10% annualized returns across our portfolio, and our award-winning platform allows you to see returns in just days (not years), with no fees. Join hundreds of thousands of others who have already invested over $1.3 billion in real estate debt through Groundfloor.

Groundfloor is open to accredited and non-accredited investors and qualifies all its opportunities through the S.E.C. offering more transparency than other platforms. With our Auto Investor account, you'll be automatically invested and diversified across dozens (even hundreds!) of projects immediately. Download the app or visit Groundfloor to set up an account today.

There’s no doubt about it: Homebuilder stocks are having a great run this decade—including another bounce this month.

Indeed, giant homebuilders like D.R. Horton (+230%), PulteGroup (+222%), and Lennar (+206%) have had a great run since December 31, 2019. That’s well above the +70% jump the S&P 500 Index saw during the same span.

That said, many residential real estate stocks outside of the homebuilding sector continue to underperform the S&P 500. This includes giant single-family landlords like American Homes 4 Rent (+38% since Dec. 31, 2019) and Invitation Homes (+20%).

Lagging even further behind the S&P 500 are stocks closely tied to residential real estate transaction volume, which remains low due to strained affordability translating into less turnover in the resale market. Take Zillow, for example, which is up only +7% this decade and still down -75% from its 2021 peak price. Similarly, Redfin is down -62% this decade and a staggering -92% from its 2021 peak price.

Many other residential stocks (not charted below) that are closely tied to resale transactions, including Opendoor, Compass, and Rocket Companies, also remain well below their 2021 peak.

Why have homebuilders outperformed other residential real estate stocks that are closely tied to resale transactions?

Despite strained affordability, big publicly traded homebuilders have continued to sell homes. Net new orders look solid.

While offering aggressive mortgage-rate buydowns has coincided with builders’ margins decreasing from the highs achieved during the Pandemic Housing Boom, most publicly traded builders still maintain margins that exceed pre-pandemic levels.

Here’s a look at some more giant homebuilder stocks 👇