Surging Home Builder Stocks Amid Housing Crisis

Home builder stocks are soaring as demand for new homes rises due to the historically tight and unaffordable existing housing market in the United States. The Federal Reserve’s efforts to combat inflation by increasing interest rates have driven US mortgage rates higher over the past year. Coupled with a limited supply of homes on the market, as many homeowners are reluctant to give up their ultra-low mortgage rates secured during the pandemic, housing affordability has reached levels not seen since 1984.

Although US mortgage rates dipped recently, breaking a five-week streak of increases, the 30-year fixed-rate mortgage still averaged 7.18% in the week ending August 31, up from 5.66% in the same period the previous year.

To avoid fierce competition and bidding wars for the limited available houses in desired neighborhoods, some Americans are turning to new construction. This shift has significantly benefited home builder stocks. While the benchmark S&P 500 index has gained around 17% this year, shares of companies like Pultegroup have surged by roughly 80%, Toll Brothers by 64%, DR Horton by approximately 34%, and Lennar by 32%.

Bank of America analysts predict that home builders will increase the pace of housing starts during the second half of the year. A recent securities filing revealed that Warren Buffett’s Berkshire Hathaway has made substantial investments in Lennar, DR Horton, and NVR, further boosting confidence in the home building sector.

Anna Rathbun, Chief Investment Officer at CBIZ Investment Advisory Services, expects the strong performance of home builder stocks to continue as long as mortgage rates remain high and housing supply remains limited. She notes that for first-time buyers, this housing market can be nearly impossible to navigate.

Additionally, furniture stocks have rallied this year, suggesting that Americans who are unable or unwilling to move are investing in home improvements. Companies like Wayfair have seen their shares rise by around 110%, RH by 37%, La-Z-Boy by 35%, and Ethan Allen by 21%.

In summary, home builder stocks are thriving as Americans turn to new construction amid skyrocketing mortgage rates and a constrained supply of existing homes. This trend is expected to persist as long as mortgage rates remain elevated and housing inventory remains limited.