A closely watched measure of home prices is about to stall out for the first time since 2012—but investors in builder stocks might want to focus on the spring selling season.
While housing market data has shown a market slowed by higher mortgage rates,
D.R. Horton’s
(ticker:
DHI
) second-quarter earnings—which were stronger-than-expected—are a good omen for other builders, one analyst wrote.
The housing market so far this spring has been defined by relatively few home sales, a dearth of new listings, and the first signs of home price drops from year-ago levels since 2012. More evidence is likely to pile up on Tuesday, when the S&P CoreLogic Case-Shiller Home Price Indices data is released.
The Case-Shiller index tracking single-family home price changes in 20 large U.S. metropolitan areas for February is expected to be flat from its level one year ago, according to consensus estimates compiled by
FactSet.
Such a reading would represent the first time home prices in the 20-city index didn’t increase from the year prior since May 2012, when they fell 0.5%.
A flat reading in the Case-Shiller index wouldn’t be the first to show slowing home prices—
Redfin
and National Association of Home Builders data both logged year-over-year price declines at a national level in February and March—but it’s still worth watching because of the measure’s influence.
The Case-Shiller index is frequently cited for home price trends due to its methodology, which measures price changes through repeat sales and is available both as seasonally-adjusted and unadjusted data. Unlike existing-home sales data, the index level is designed to be unaffected by the size or type of homes sold in a given period.
Recent housing data may reflect a cooling in the housing market that doesn’t match up with buyers’ experiences, Lawrence Yun, the National Association of Realtors’ chief economist, said earlier this week. The trade group’s measure of existing-home sales in March fell 2.4% from February’s level, and was 22% lower than the same month last year.
Other data show that competition remains, though, particularly among entry-level homes, Yun said. Of the homes sold in March, 28% changed hands for more than listing price—a sign of multiple offers on the same home, the economist said.
“This is a very unique market,” Yun said, as Barron’s reported. “Sales are down, and even prices are down in some areas, yet from buyers’ perspective, it’s hard to get that home because they are competing with other buyers.”
Higher mortgage rates didn’t just cut into demand. It also likely resulted in sellers choosing not to list—a dynamic that could be a plus for home builders. Builders have more leeway than homeowners to sweeten deals through incentives and price adjustments, Barron’s housing roundtable panelists discussed in March.
Take
D.R. Horton,
the nation’s largest public builder, which reported earnings on Thursday. The company exceeded per-share earnings estimates and reported 23,142 net sales orders—about 17% more than consensus had expected.
“Despite higher mortgage rates and inflationary pressures, demand improved during the quarter due to normal seasonal factors, coupled with our use of incentives and pricing adjustments to adapt to changing market conditions,” D.R. Horton CEO David Auld said during a conference call discussing the results. “Although higher interest rates and economic uncertainty may persist for some time, the supply of both new and existing homes at affordable price points remains limited, and demographics supporting housing demand remain favorable.”
Investors took the news in stride: D.R. Horton’s stock rose 5.6% on Thursday, closing at $107.60—its highest close since Dec. 31, 2021, according to Dow Jones Market Data.
The company’s earnings “strongly corroborate increasingly positive industry feedback we’ve seen from the past several weeks,” wrote Buck Horne, a Raymond James analyst covering the home builders, in a Thursday note restating his Market Perform rating on the company’s shares. The results are a positive sign for other builders trading at lower valuations, the analyst wrote, noting that D.R. Horton’s price-to-book ratio is 30% higher than the sector average.
“Uncertainty in the near-term housing outlook remains elevated and dependent on relative stability in mortgage rates,” Horne wrote, adding that “it appears increasingly clear that DHI and other builders can still benefit from a deep reservoir of demographic demand and structural supply deficits.”
Write to Shaina Mishkin at shaina.mishkin@dowjones.com
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