Why homebuilder stocks are outperforming despite a tough housing market

our theme housing stock, Stock indices that include stocks of homebuilders, building materials companies and home improvement companies have done relatively well so far in 2023, up about 16% year-to-date. This compares to the S&P 500, which has maintained an increase of around 6% over the same period.

Now, the latest signs from the housing market are actually grim as soaring raw material prices and rising mortgage rates hit housing sector stocks well into 2022. Estimated 831,000. Home prices have also cooled slightly, with the median sales price for new homes sold in January 2023 falling almost 1% year-over-year to $427,500. Housing starts, a measure of new construction activity, fell 4.3% month-on-month in January for single-family homes, which account for the bulk of housing construction. However, the worst of the housing market may be over, as there are multiple positive developments in the housing sector as well.

First, inflation is clearly appearing to be easing. Retail inflation eased to 6.4% in January from 7.5% in the same period last year. This will give the US Federal Reserve (Fed) confidence to ease the pace of rate hikes. The most recent rate hike was 0.25%, down from last year’s multiple rate hikes of 0.75%. The average 30-year fixed rate mortgage in the US will be around 6.6% in 2022, down from a November high of around 7.1%. This can make financing your new home a little cheaper. The housing shortage is also still fundamental, with various estimates that the country may be 1.5 to 5 million short of housing. This could indicate that housing suppliers may still have a fairly good demand outlook as the economy recovers and inflation eases.

in our theme Installed building material (NYSE:IBP) shares are up about 34% year-to-date, their strongest performance yet. Meanwhile, Home Depot stock (NYSE:HD) is the worst performer this year, down about 6%.

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[1] Month-to-date and Year-to-date as of March 7, 2023
[2] Cumulative total return since the end of 2016

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The views and opinions expressed herein are those of the authors and do not necessarily reflect those of Nasdaq, Inc.