Source: U.S. Census Bureau. U.S. Department of Housing and Urban Development via FRED. Shaded areas indicate U.S. recessions.

Homebuilder stocks have rebounded and outperformed the S&P 500^® Index by roughly 11% over the last three months following a period of underperformance dating back to September 2024.¹

What’s driving investor optimism? We’re finally seeing builders react to extreme supply levels. The monthly supply of new houses in the U.S. (black line, left axis) has been trending higher since early 2024 and sitting above nine months since May. This level approaches what we typically see during recessions. New home inventory has jumped as existing home inventory and sales have fallen, with affordability hitting 30-year lows.

Housing starts (orange line, right axis), meanwhile, have declined -14% since February. Why does this matter? Fewer starts are a precursor to inventory moderation. Historically, we’ve seen housing starts decline in reaction to increases in monthly supply, particularly during economic downturns (shaded area indicates U.S. recessions). A gradual pullback in starts should help relieve supply pressure, assuming demand continues at a decent pace.

We’ve also seen mortgage rates ease to a 10-month low of 6.56%. This should help from a demand dynamic, but likely continue to hold back existing home supply as current mortgage holders have rates averaging around 4%. Rates may need to fall to around 5% to meaningfully unlock existing supply, which should allow homebuilders to continue to compete unencumbered by significant increases in existing home inventory.

Historically, we’ve observed an inverse correlation between peaks in new home inventory and when homebuilders typically begin to outperform. This early cycle behavior suggests builders may be entering a new growth phase, though this outlook needs confirmation through improving fundamentals. This dynamic extends beyond homebuilders to related industries like home improvement and furniture, where high mortgage rates and affordability constraints have pressured big-ticket purchases.

We turned more cautious on homebuilders in late 2024 due to supply growth concerns, but now the precursor for inventory moderation – fewer starts – is in place. The market is anticipating relief and is not going to wait for inventories to get in line. While some investors are jumping ahead and anticipating the cycle turn, more time may be needed before confirming the next growth phase.

 

– Josh Cummings

IMPORTANT INFORMATION

Concentrated investments in a single sector, industry or region will be more susceptible to factors affecting that group and may be more volatile than less concentrated investments or the market as a whole.

Real estate securities, including Real Estate Investment Trusts (REITs), are sensitive to changes in real estate values and rental income, property taxes, interest rates, tax and regulatory requirements, supply and demand, and the management skill and creditworthiness of the company. Additionally REITs could fail to qualify for certain tax-benefits or registration exemptions which could produce adverse economic consequences.