The American housing market is experiencing a seismic shift as a growing number of Americans are turning their backs on existing housing options due to soaring mortgage rates and an unrelenting scarcity of homes on the market. This unprecedented surge in demand for construction of new homes comes at a time when the Federal Reserve is making a concerted effort to combat inflation by raising interest rates, which has, in turn, caused US mortgage rates to skyrocket. As of the week ending August 31, the average mortgage rate in the United States stands at a staggering 7.18%, a notable increase from the 5.66% rate seen just a year ago.
This dramatic rise in mortgage rates, combined with the historically low rates that many homeowners secured during the height of the pandemic, and a limited supply of homes for sale due to the reluctance of owners to relinquish their advantageous rates, has led to a surge in demand as new homes are now more unaffordable than they have been since 1984.
Amid this housing crisis, Americans are increasingly opting for new construction as a viable alternative. In particular, the competition for a limited number of houses in coveted neighborhoods, as well as the desire to avoid bidding wars, has spurred interest in new builds. This shift is evident in the stock market, where home builder shares are performing exceptionally well, hovering just below their all-time highs.
Pultegroup shares, for instance, have surged by approximately 80%, while Toll Brothers has experienced a remarkable 64% increase. DR Horton’s stock rose by about 34%, and Lennar climbed 32%. The optimism surrounding home builders is further supported by Bank of America analysts, who anticipate an acceleration in housing starts during the second half of this year. This sentiment is echoed by Berkshire Hathaway, led by Warren Buffett, which has made substantial investments in Lennar, DR Horton, and NVR. While home builder stocks did face some headwinds in August, in line with the broader market, experts like Anna Rathbun, the Chief Investment Officer at CBIZ Investment Advisory Services, believe that their momentum will persist as long as mortgage rates remain high and the shortage of existing homes continues.
Notably, the surge in demand for new construction is not limited to homes alone. Furniture stocks have also experienced a resurgence this year, indicating that Americans who are unable or unwilling to relocate are choosing to invest in improving their current homes. Companies like Wayfair have seen their shares soar by approximately 110%, while RH has risen by 37%. La-Z-Boy and Ethan Allen have also reported substantial gains of 35% and 21%, respectively.
In summary, the confluence of soaring US mortgage rates, a historically tight and unaffordable existing housing market, and homeowners’ reluctance to sell has driven many Americans to embrace new construction when searching for new homes. This shift has provided a significant boost to home builder stocks, and the remainder of the year appears poised for solid growth in the industry. With Berkshire Hathaway’s endorsement and the anticipation of increased housing starts, the future looks bright for home builders, offering a glimmer of hope in an otherwise challenging housing landscape.
Source: CNN
