The Housing Market Economy: To Rise or Subside?
Lennar Corporation (NYSE:LEN), D R Horton Inc (NYSE:DHI), and PulteGroup Inc (NYSE:PHM) breaking record levels in stock price, is an economic puzzle, considering the US interest rate is at a 20-year high. Following the last pattern, a high Federal Funds Rate precedes an economic downturn which the housing market is one of the first to show signs of.
Precursor to the last recession from December 07’ to June 09’, the Fed increased the interest rate to 5.25% from October 06’ till July 07’, due to which there was a steady decline in Lennar stock price from April 06’ to July 09’ before it began recovery. Currently, the interest rate again resides at 5.25% and the national 30-year average fixed mortgage rate is at a high of 7.21% for new buyers in America. Yet, home construction companies like Lennar, D R Horton, & PulteGroup are experiencing all-time high stock prices (reporting July 14, 2023). What is so obscurely different this time around?
There is a decrease in supply for available existing home inventory – NAR (National Association of Realtors) reported that there were only 1.08 million existing homes on the market at the end of June 2023, while, in May 2019, there were 1.91 million. Evidently as homeowners who have locked in a good mortgage rate are not inclined to sell, as according to Redfin, 82.4% of homeowners have a rate below 5%. Following that, foreclosures and short sales in May 2023, experienced no increase, being only 2% of total home sales, approximately the same as May 2022, creating no new supply.
In terms of demand, according to NAR, existing home sales are down, as approximately only half the existing home inventory is available compared to 2019. While new homes are selling at the same pace as before the pandemic.
On June 15 2023, Lennar’s Q2 2023 Earnings Call, executive Chair Stuart stated, “the supply of housing across the country is in very limited supply.” He further added about the overqueued demand, “the core elements of the supply shortage will not resolve in the near term as the almost 15-year production deficit will take years to resolve.”
The net average sales prices on home closings have dropped approximately 10%-11%, according to Lennar’s internal numbers, and NAR reported median sale price to be down 3.1% from May 2022. On top of depleted supply, as per Lennar, the housing market has acclimated to normal due to adjusted lower pricing, coupled with incentives like rate buy downs and production costs, which allow affordability for home-buying consumers.
Lennar has indeed guided a higher full-year forecast, raising home deliveries forecast for 2023 to 68,000 – 70,000 homes, an increase from its earlier guidance of 62,000 – 66,000 homes. Additionally, projecting a further improvement for margins next quarter in the range of 23.5%-24%, after 22.5% in Q2 from 21.2% in Q1.
From previous economic benchmarks, Fed Chairman Jerome Powell states, the housing market “is very interest rate-sensitive” and one of the first to experience fluctuations, as interest rates rise or decline. Considering the already significant rise of the interest rate, is the rate hike nearing its conclusion? Will the Fed’s Jerome Powell be right as the housing market could become interest-rate sensitive and face a downturn? Or will Lennar Corporation and other home construction companies be able to soldier through the high interest rate environment given there is simply a lack of inventory for homes available?