Investors who sold home builder stocks following
D.R. Horton’s
strong earnings last week may have exited too early.
Shares of some of the biggest industry players closed at new highs after two builders reported earnings Tuesday.
PulteGroup
(ticker: PHM), the nation’s fourth-largest builder by market capitalization, reported second-quarter earnings of $3.21 per share on total revenue of about $4.2 billion. The results beat consensus expectations, which called for earnings of $2.52 per share on about $4 billion in revenue, according to
FactSet.
The bump was enough to push
PulteGroup
shares to a new closing high—and the builder wasn’t alone. Shares across the industry rose on Tuesday, with
D.R. Horton
also climbing to a new high, according to FactSet.
Shares of
NVR
(
NVR
), the third-largest builder by market capitalization, closed about 2.1% higher after the builder reported earnings per share of $116.54 on consolidated revenue of $2.34 billion, beating per-share earnings expectation of $103.76 but missing revenue estimates of about $2.4 billion, according to FactSet.
Home builders have had a hot run this year. Two exchange-traded funds tracking home builders and related companies, the
SPDR S&P Homebuilders
exchange-traded fund (XHB) and
iShares U.S. Home Construction
ETF (ITB), have returned about 38% and 45%, respectively, outpacing the broader S&P 500.
That could be why some investors sold after D.R. Horton, the nation’s largest home builder by market cap, reported earnings last week that easily beat Wall Street expectations. Shares of builders across the industry fell along with D.R. Horton.
Carl Reichardt, an analyst covering home builders at BTIG, wrote in a note last week that D.R. Horton’s results represented “a very strong quarter,” and its fiscal fourth-quarter guidance beat the analyst’s expectations. “We believe investors may have ‘sold the news’ after the positive results,” he wrote.
Whatever the reason for last week’s dip, the stock reaction to PulteGroup’s results shows that investors remain enthusiastic about builders. Builders’ recent outperformance comes as higher mortgage rates have kept some homeowners from selling, resulting in relatively little supply of existing homes, sending some would-be buyers to builders.
Such a dynamic has led some prospective buyers to seek out options from builders as housing costs remain high and existing-home options limited. “Recent feedback from our first-time buyers indicate that an overwhelming majority bought a new construction Pulte home rather than an existing home because they felt it offered the best overall value,” PulteGroup president Ryan Marshall said.
The relative dearth of homes on the market looks poised to continue, Marshall said. “Beyond the company’s specific benefits we are realizing from how we run our business, we appreciate the favorable supply-demand dynamics resulting from the limited stock of existing houses available for sale,” he said.
Higher mortgage rates, which have averaged above 6% throughout this year, have removed some of the incentive for current homeowners to sell. A June
Redfin
analysis of Federal Housing Finance Agency data found that about 92% of homeowners with a mortgage have a rate below 6%, while 62% have a rate below 4%.
Mortgage rates are expected to remain well above that level , Marshall said on the call. “I haven’t seen any rate forecast that show the country getting back to 4% mortgages anytime soon—so it’s likely that existing homes remain in short supply for the foreseeable future,” he said.
Higher mortgage rates have changed the way some buyers shop for and purchase a home, according to PulteGroup. The number of cash buyers has increased, particularly among buyers approaching retirement, Marshall said. Some first-time buyers, meanwhile, are reducing costs by shopping for smaller homes or ordering fewer upgrades. “Today’s dynamic market environment is why our ability to offer a significant mortgage incentive nationally is such an effective sales tool,” Marshall said on the call.
Buyer demand was strong in the second quarter, said Marshall, noting the 24% increase in orders compared with the same period last year. “We generally saw positive demand across our markets, which has continued into the month of July,” he said—though the company is still adjusting pricing and offering incentives in some western markets, he added.
The next test for home builder stocks will come Wednesday, when government data tracking new home sales is released. Consensus estimates compiled by FactSet expect that that new homes in June were sold at a seasonally-adjusted annual rate of 722,000, down from May’s rate of 763,000, but about 28% higher than last June.
Write to Shaina Mishkin at [email protected]
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