The Rise of Homebuilder Sales and Stock Prices Amid High Mortgage Rates

Key Takeaways:

• Homebuilder PulteGroup reported better-than-expected first-quarter earnings, with closings increasing 11% as incentives and a shortage of existing homes for sale funneled buyers to new builds.
• Census Bureau data showed new home sales rose to an annualized rate of 693,000 in March, the most since September.
• High mortgage rates have locked homeowners into their current loans, benefiting homebuilders by depriving the market of existing housing stock.

Shares of U.S. homebuilders rose on Tuesday amid signs that a dearth of existing homes for sale and resilient demand in the face of high interest rates are buoying earnings. PulteGroup (PHM), one of America’s largest homebuilders, reported profit increased 32% to $3.10 per share in the first quarter, well ahead of the $2.37 consensus estimate among analysts surveyed by Visible Alpha. Home sales revenue increased 10% to $3.8 billion in the period, driven by an 11% increase in closings.

“After more than a decade of underbuilding, it is estimated that our country has a structural shortage of several million homes,” said President and CEO Ryan Marshall in the company’s earnings release. “Given PulteGroup’s broad operating platform and deep product portfolio … we are well positioned to expand our market share while helping to provide much-needed new housing stock.”

But underbuilding isn’t the only reason buyers are increasingly turning to new homes constructed by builders such as Pultegroup. High mortgage rates, currently averaging about 7.5%, have effectively locked homeowners into their existing 3% and 4% mortgages, starving the market of inventory. Plus, homebuilders have been able to offer homebuyers incentives like mortgage rate buy-downs, taking some of the edge off high rates and keeping new builds selling.

New-Home Sales Surge, Existing Homes Languish

New home sales in March rose to an annualized rate of 693,000, an 8.8% increase from February and the most since September, according to data released Tuesday. The median sales price rose to $430,700 from $406,500 the month before.

Meanwhile, existing home sales fell nearly 4% year-over-year in March to an annual rate of 4.19 million, the National Association of Realtors said last week.

Shares of PulteGroup finished up 4.6% Tuesday following the strong earnings report, bringing their 12-month return to nearly 80%.

Industry peers Builders FirstSource (BLDR) and D.R. Horton (DHI) closed up 5.1% and 3.5%, respectively, on Tuesday. Builders FirstSource stock has roughly doubled in price in the last 12 months, while D.R. Horton has gained about 38%. Toll Brothers (TOL) gained 5% Tuesday and has gained more than 90% over the past year, while Lennar (LEN) increased 3.1% and is up about 40% in the last 12 months.

Overall, the rise in new-home sales and stock prices of homebuilders despite high mortgage rates indicates a strong demand for new housing and a shortage of existing homes for sale. As long as high mortgage rates continue to lock homeowners into their current loans, homebuilders are likely to benefit from the lack of inventory in the market.

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