A chill has descended on the once white-hot US housing market. Since the start of 2022, mortgage rates have more than doubled — with the average 30-year fixed rate over 7 per cent.
April existing home sales, which make up most of the housing market, were down sharply compared with the year-ago period, according to the National Association of Realtors. Mortgage lenders are expected to originate a quarter fewer loans this year compared with 2022.
Improbably, US homebuilders have bucked the gloom. The sector is one of the top performers over the past 12 months. Shares in the five leading builders — DR Horton, Lennar, PulteGroup, Toll Brothers and NVR — all trade at or near record highs after climbing between 75 to 100 per cent. Compare that with the S&P 500’s 17 per cent rise.
Valuations, too, are relatively pricey. Lennar trades on 12 times forward earnings and DR Horton at 11 times — both the highest since autumn 2020.
The reason? While sales of previously owned homes are down, prices have held steady. To the frustration of would-be buyers, sellers have decided to hold tight. This has kept the supply of houses for sale low. A healthy housing market should have four to six months of inventory, and in April there was about 2.9 months of inventory.
Instead, house-hunters are turning to new builds. Lennar ended its fiscal second quarter with 17,885 new orders, a 1 per cent rise on the year-ago period. It also said it expected to deliver 68,000-70,000 homes this year, up about 8 per cent from its previous forecast range.
Last year, when it reported record revenue and profits, it delivered 66,399 homes. The industry had then benefited from the drop in lumber prices, which hit an all-time high in 2021 during the pandemic. But lumber prices bottomed earlier this year. Lennar’s operating margin should drop a third to about 14 per cent in the year to November.
The run-up in the sector’s valuation looks unsustainable. This house party cannot last for much longer.
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