While homebuilding stocks lag the broader market, builders selling to wealthy buyers are faring better than those selling starter homes
There’s no place like home, but investors are finding plenty of places they’d rather put their money. While the S&P 500 climbed 13% year-to-date, American homebuilder stock has gone nowhere, or straight down.
Shares of Lennar, which builds mostly starter homes for middle-income families, dropped 20% since the start of the year. D.R. Horton, the country’s largest builder, is down 2%. Among the top builders is the Toll Brothers, whose buyers are mostly wealthy. But even their stock is flat, only up 2%. Pulte, targeting “move-up” families with more equity, is similarly positioned to Toll, rising only 1%.
Affordable builders are cutting prices and buying down mortgage rates to keep sales moving through an affordability crisis. Those incentives are now the load-bearing wall holding up the industry.
Luxury builders face fewer headwinds, largely because their buyers are insulated from high rates and the affordability crisis.
“We’re seeing the tale of two markets, basically the top 10 percent and the bottom 80 percent,” said Jon Brooks, Florida-based broker who sees wealthy buyers buying in cash, with enough funds to buy million dollar homes and price out local buyers.
The decline in homebuilding stocks is related to the rise in interest rates, but they didn’t fall any further with the most recent Federal Reserve rate hike, the first since 2023. Investors generally were expecting a rate increase and say it was priced into the dip. The concern for investors is how middle-income consumers can afford the sticker price of the homes themselves.
“So Toll Brothers is going to be relatively better positioned within home building simply by virtue of their buyer positioning, Pulte is going to be similarly positioned to Toll,” said Sam Reid, analyst at Wells Fargo who rated both builders as overweight.
About a quarter of Toll’s buyers pay all cash, so they are largely indifferent to where mortgage rates go. Chief Executive Karl Mistry credited, “the resilience of our affluent customer base.”
Still, during their third fiscal quarter, home sales revenue fell 8% to 2.65 billion and net income dropped 24% to $280 million. Their demand is still steadier than rivals with signed contracts rising 5% by units, and the average delivered home sold for about $996,000.
As for Lennar, executive chairman Stuart Miller said conditions had “deteriorated since our last earnings call,” with a buyer at median income “stretching well past 30% of gross income to carry a home.” Their third-quarter net earnings fell by more than half, to $284 million from $591 million, on revenue that slid 9% to $8 billion. Lennar’s closing stock price is at $81.59 per share.
“It’s kind of a double-edged sword where you get pressure from higher mortgage rates and you also get pressure from cost inflation but can’t pass that price on to the buyer,” said Jonathan Bettenhausen, equity research analyst at Truist Securities, who recommends buying both Pulte and Toll and holding the other builders.
The 10-year treasury will spread to the Fed funds rate, so analysts say there is always a chance that we get into another hiking cycle and the upward pressure on mortgage rates could split the homebuilders further. However, we could also be at the highest point right now.
“Over the first three to five rate hikes, you see negative reactions over the following month. And then that starts to turn and investors start to get into these names early, anticipating an end of the hike,” said Bettenhausen.
Others doubt the builders will ever fully recover.
“I wouldn’t touch it with a 10-foot pole,” said Jon Brooks, Florida-based real estate broker who says that changing demographics over the next 20 years, including 50 million baby boomers passing on their homes and declining birth rates will reduce demand.
“Long-term, builders are just not attractive because they’re going to be competing with existing inventory that’s going to be expanding,” said Brooks.
Some retail investors are not waiting to find out what will happen, choosing to invest in more stable sectors.
“Personally, I shifted last year from real estate to technology and AI stocks after seeing where interest rates were heading,” said Jonathan Gropper who sold his Lennar shares over the past year anticipating some of the headwinds.