US homebuilders really do look as safe as houses
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Few investors predicted that US homebuilders would prove to be standout performers in an era of rising interest rates. Changes to their balance sheets mean forecasting their performance might not be much simpler when rates ease, either.
Since the Federal Reserve began to tighten policy in March 2022, the top five homebuilders by market value have delivered a total return of, at worst, about 80 per cent and, at best, just over 200 per cent. The S&P 500 has managed 37 per cent. These old economy stocks have even outperformed the index since February, when Warren Buffett — the spiritual leader of long-term stock pickers — sold his stake in the biggest, DR Horton, after less than a year with no explanation.
Gains have been driven by the fact that sharply rising rates effectively trapped American homeowners unwilling to give up low fixed-rate mortgages, limiting supply and leaving sellers of new homes almost the only game in town. The speed and scale of rate rises are still protecting homebuilders now. Mortgage rates may have eased from a high of 7.9 per cent for a standard 30-year loan to 6.4 per cent. But about two-thirds of existing loans carry interest rates of 4 per cent or less.
Of course, homebuilders cannot escape the cyclicality of their industry entirely. If a US slowdown does indeed become a recession they will suffer: people who fear for their jobs tend not to commit to a new house. But the biggest companies have improved their operating model, cutting debt and lightening up on land commitments via options and joint ventures. By next year, overall leverage in the sector will have halved from 2019 levels, says S&P, leaving total debt at an undemanding two times ebitda. That should help limit their downside.
Last month DR Horton was rated A-minus by Fitch Ratings — the first-ever A rating for the sector, according to CreditSights researchers. A rating of that level is an eye-catching vote of confidence in the company’s ability to weather the inevitable industry cycles.
Over the past month, the biggest homebuilders by market value outperformed the main industry ETF, as well as the S&P 500. The industry can’t avoid its cyclicality entirely. But companies can adapt their operating models and, so far, it is the biggest that have proved most nimble.
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