DR Horton & Other Homebuilder Stocks Are Having A Rough Year. Will Things Get Better?

Housing Market Overview - The U.S. housing market has shown signs of cooling, with housing stocks rising only about 4% year-to-date compared to a 13% gain in the S&P 500 [1] - New home sales declined by 4.7% in April to a seasonally adjusted annual rate of 634,000 units, and were down 7.7% year-over-year [2] - The average price for new homes increased by 3.9% to $433,500 in April compared to the previous year, driven by higher mortgage rates [2] Mortgage Rates and Demand - The average 30-year fixed mortgage rate rose to approximately 7% in early May from about 6.6% in early January, impacting home purchase financing costs [2] - The "lock-in" effect has reduced the supply of existing homes, as about 90% of U.S. homeowners had a mortgage rate below 6% as of January 2024 [3] - Higher mortgage rates are affecting overall demand, leading to a decline in new home sales [3] Company Performance - D.R. Horton, Inc. (DHI) stock has seen a significant increase of 100% from $70 in early January 2021 to around $140, outperforming the S&P 500, which increased by about 40% during the same period [4] - DHI's stock returns were 57% in 2021, -18% in 2022, and 70% in 2023, consistently beating the S&P 500 [4] - The Trefis High Quality Portfolio has outperformed the S&P 500 each year, indicating that DHI and similar companies may provide better returns with less risk [4] Future Outlook - There remains a fundamental under-supply of homes in the U.S., which may provide good demand visibility for major housing players [4] - The Federal Reserve is considering multiple interest rate cuts this year, which could lower mortgage rates and stimulate demand [4] - Easing supply chain constraints and price corrections for construction materials may also benefit home builders [4]