Homebuilder Stocks In 2024: Can The Sector Enjoy Another Stellar Year?

As the slowdown in home sales continues through 2023, homebuilders could be facing a tough few months in early 2024 as interest rates remain at multi-year highs and the labor market growth begins to stall.

While sales are falling — largely due to affordability issues given higher interest rates — builders have continued to show growth in construction because of chronic shortages of new housing supply.

“As has been the case throughout this year, limited inventory and low housing affordability continue to hamper home sales,” said NAR Chief Economist Lawrence Yun.

Shares Have Strongly Outperformed The Market

Slowing sales, however, have had little impact on the shares in the sector. DR Horton DHI, the biggest homebuilder on the S&P 500 by market capitalization, is up 44% year to date, while Lennar Corporation LEN, ranked second in market cap, has gained 42% this year.

Two other builders have had outstanding performances this year: Toll Brothers TOL, which operates in the higher-end homes sector where affordability issues are less of a concern, has gained 86%, while PulteGroup PHM is up 94%.

The SPDR Series Trust SPDR Homebuilders ETF XHB, an exchange-traded fund that tracks homebuilder stocks on the S&P 500 index, has gained 37% since the start of the year.

How has the sector managed such a strong performance in 2023, given the fundamental backdrop?

“Fed actions and broader market forces have combined to push interest rates to 20-year highs, but the fundamental desire for home ownership is strong while the supply of houses remains constrained,” said Ryan Marshall, president and CEO at PulteGroup, which reported growth in nearly all metrics at its third-quarter results presentation.

Also Read: Existing Home Sales Fall In October As Inventory Remains Tight

Supply Chains Remain A Problem

Marshall’s latter point is one reflected throughout the industry: housing starts have failed to keep pace with household growth as the number of households has more than doubled since 1970, according to data from the U.S. Census Bureau.

Housing starts data show that, while the industry responded with a strong rebound in activity at the beginning of 2023, the pace of growth has slowed. The most recent data for the month of October showed housing starts rose 1.9% to 1,372,000 units, but were around 13% below the peak seen in May.

The main reason for this is the hangover from the pandemic, when demand for new homes surged as people reassessed their lifestyles to adapt to new hybrid working conditions, while others took early retirement — all making the most of record low interest rates.

Homebuilders responded to the demand surge, but couldn’t keep pace as supply constraints due to shortages of materials and labor weighed on output. Most companies in the sector are still reporting problems with supply chains.

Looking Ahead To 2024

A similar mix can be expected in early 2024 but, as supply chains continue to ease, the rate of housing starts should pick up.

But what about Demand? As has been demonstrated, higher interest rates have had little impact on sales and profits in the sector — mainly affecting the younger, first-time buyers. Thanks to a strong labor market, buyers have felt confident about taking on higher mortgages and, as the Federal Reserve is expected to begin to lower interest rates next year, mortgage rates will follow.

Perhaps the darkest shadow over the sector will be the risk of an economic slowdown and a weakening of the labor market. If buyers lose confidence, the sector could face bouts of profit taking during 2024 following an outstanding 2023.

Now Read: US Housing Market Braces For Affordability As Mortgage Rates Ease: What Analysts Expect For 2024

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