There’s no doubt about it: Homebuilder stocks had a difficult time in 2022.
As you can see in the chart below, the SPDR S&P Homebuilders ETF (XHB), an index that tracks U.S.-based homebuilding companies, had a bumpy year. For the year, XHB fell nearly 30%.
The good news is that the XHB has been on an incline since. Year-to-date, the XHB has risen around 15%. In comparison, the S&P 500 has rallied about 8%, while the Dow is up nearly 2%.
Now, there was a slew of housing data released this week, so in today’s Market 360, we’ll review the latest reports. Then, I’ll share the latest earnings from the U.S.’s largest homebuilder stock that indicates that a rebound in the housing sector could be in the cards.
News in the Housing Market
The Commerce Department on Tuesday reported that single-family home starts rose 2.7% in March to an annual pace of 861,000. All regions were strong, except the West where wet winter weather caused housing starts to plunge 16% in March. However, multi-family home starts declined 6.7% to an annual pace of 542,000.
Single-family building permits rose 4.1% in March to a five-month high, while multi-family permits declined 24.3%. Overall, building permits declined 8.8% in March to an annual pace of 1.413 million. A weak rental market is clearly impacting multi-family home starts and permits.
On Wednesday, the National Association of Realtors revealed that the median U.S. home sale price slipped 3.3% in March to $400,528. This marks the biggest year-over-year decline since 2012. In February, the median U.S. home sale prices fell 1.2%. This was the first time the median U.S. home price had declined on an annual basis since 2012.
NAR Chief Economist Lawrence Yun commented, “Home sales are trying to recover and are highly sensitive to changes in mortgage rates … Yet, at the same time, multiple offers on starter homes are quite common, implying more supply is needed to fully satisfy demand. It’s a unique housing market.”
Existing Home Sales
And then on Thursday, the National Association of Realtors announced that existing home sales declined 2.4% in March after surging 14.5% in February. Median existing home prices declined 0.9% in March to $370.300, compared to $375,700 in the same month a year ago. Median home prices peaked at $413,800 in June of last year and have declined 9.2% in the past nine months.
The inventory of existing homes for sales now stands at 980,000, up 1% from February and 5.4% compared to a year ago. In March, the average home was on the market 29 days, down from 34 days in February, so inventories remain tight.
The Impact of Mortgage Rates
We can’t discuss the housing sector without reviewing mortgage rates. The reality is key interest rates hikes, which triggered an increase in mortgage rates, largely contributed to the volatility of homebuilder stocks in the past year. The average 30-year fixed-rate mortgage surged to a high of 7.08% in October of 2022. In October 2021 the average 30-year fixed-rate mortgage stood at 3.503%.
Since the start of 2023, the 30-year fixed-rate mortgage has bounced between 6% and 7%. However, mortgage rates have fallen for the fifth-consecutive week. So, the 30-year fixed-rate mortgage ended last week at 6.27%, down from 6.28% the week before.
However, after mortgage rates declined for five weeks, the 30-year fixed mortgage did rise to 6.39% this week, so home sales may continue to decline due to affordability issues.
The good news is the high mortgages didn’t weigh on demand for one major homebuilder: D.R. Horton (DHI).
Largest U.S. Homebuilder Reports Strong Earnings
D.R. Horton, the largest homebuilder in the U.S., announced positive second-quarter earnings and revenue for its fiscal year 2023 Thursday morning. The company reported earnings per share of $2.73 – a 32% decrease from earnings per share of $4.03 in the same quarter a year ago, but higher than analysts’ expected earnings of $1.93 per share.
Revenue came in at $7.973 billion, down 0.3% from revenue of $7.999 billion in the same quarter a year ago. However, this beat analysts’ estimates of $6.452 billion. For the first six months of fiscal year 2023, revenue came in at $15.23 billion, up from roughly $15.05 billion in revenue in the first six months of fiscal year 2022.
For full-year 2023, the company expects revenue of $31.5 billion to $33 billion, which beats FactSet’s estimates of $28.41 billion.
In a press release, Donald R. Horton, chairman of D.R. Horton’s board, said:
Despite higher mortgage rates and inflationary pressures, demand improved during the quarter due to normal seasonal factors, coupled with our use of incentives and pricing adjustments to adapt to changing market conditions.
Although higher interest rates and economic uncertainty may persist for some time, the supply of both new and existing homes at affordable price points remains limited, and demographics supporting housing demand remain favorable.
Shares of D.R. Horton surged 8.4% to a new 52-week high of $110.37 following the earnings release.
It’ll be interesting if PulteGroup, Inc. (PHM) management shares a similar sentiment when the company announces its first-quarter earnings report next Tuesday, April 25. Currently, analysts expect earnings of $1.81 per share on revenue of $3.27 billion. This compares to earnings of $1.83 per share and revenue of $3.19 billion in the same quarter a year ago. Earnings estimates have held steady in the past two months.
Earnings Are Working
One big takeaway for me from D.R. Horton’s earnings report and Wall Street’s response to the earnings is that earnings are working. In other words, earnings winners are being rewarded.
I should add that FactSet reports that S&P 500 companies that have posted a positive earnings surprise have experienced an average rise of 3.1% in the two days prior to the release through the two days following the earnings report.
This is great news for my Growth Investor stocks, as they all boast superior fundamentals. So, I fully expect wave-after-wave of positive earnings surprises to drive my Buy List stocks in the coming weeks.
And those big post-earnings moves could come soon; I have 17 Buy List companies set to release results next week and another 22 set to post earnings in the first week of May.
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