Strong Homebuilder Performance In November Hints At 2024 Tailwind For 'Plow-Horse Economy'

Construction could be a major tailwind to economic growth in 2024 if homebuilding keeps pace with the rate at which it grew in November and demand for new homes remains robust.

Housing starts surged by 14.8% to 1,560,000 in November, well above consensus expectations of 1,360,000, with an 18% surge in starts of single-family homes driving the numbers. Building permits fell 2.5% to 1,460,000, slightly lower than the expected 1,465,000.

Builders have seen strong demand for new homes in 2023 despite high interest rates. This has come as something of a surprise to markets, which sold off homebuilders when the Fed funds rate peaked at 5.25%-5.5% in July on expectations that rising mortgage rates would stifle demand.

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Sector Sees Renewed Buying

Yet, demand continued to outstrip supply and after a three-month sell-off, the sector saw renewed buying. The SPDR Series Trust SPDR Homebuilders ETF XHB, an exchange traded fund that tracks homebuilder stocks, is up 58% over the year.

The most recent mortgage rate data from Freddie Mac showed the average rate on a 30-year loan fell to 6.95% in the latest week, down from 7.03% in the previous week and the seventh-consecutive week of declines.

Mortgage approvals, meanwhile, have increased for the sixth-consecutive week, surging by 7.4% in the week ending Dec. 8, according to data from the U.S. Mortgage Bankers Association.

Regarding Tuesday’s housing starts data, Alex McGrath, chief investment officer at NorthEnd Private Wealth, said, “Yet another expansionary statistic in the face of the Fed seemingly relenting on their battle against inflation.”

“We'll have to see what effect and possible revisions this will have down the line, but high rates and QT continue seemingly to have no effect on this plow-horse economy,” he added.

Homebuilder shares have had a good year in 2023 as demand for new homes has remained robust despite high interest rates. On Tuesday, shares in DR Horton DHI were up 1.1% in early trade at $150.26, while Lennar Corporation LEN gained 1% to $148.70 and Pulte Group PHM rose 1.8% to $103.94.

“Investors have clearly rewarded homebuilders as low inventory of existing homes on the market has created an opportunity for new construction,” said Jeffrey Roach, chief economist for LPL Financial.

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