Wall Street’s Big Homebuilder Trade Has Stopped in 2024–Here’s Why

The enthusiasm that fueled housing market stocks in 2023 has come to a halt. 

Wall Street turned bullish on the sector last year as they realized that high interest rates wouldn’t hurt homebuilder businesses as much as anticipated. Shares of homebuilders PulteGroup and DR Horton saw rallies of 127 percent and 70 percent, respectively, to help the sector outpace the S&P 500 in 2023 by a wide margin.

Despite a banner 12-month stretch, homebuilder stocks are lagging the benchmark index in 2024. Investors have cooled on the housing trade as the Fed’s policy outlook remains murky.

“As rates stay higher for longer, active inventory in some markets has begun to tick up,” said Lance Lambert, the co-founder of real estate research outlet ResiClub. “Big builders I talk to haven’t seen an impact on sales yet in markets like Florida, where active inventory is rising.”

To be clear, homebuilding stocks aren’t crashing. But this year’s relatively muted trading comes as a stark reversal compared to a couple of quarters ago. 

Gains for names like PulteGroup, DR Horton, KB Home, and Meritage have slowed this year. Nine of the biggest homebuilders have fallen behind the S&P 500 in 2024, which points to uncertainty on housing demand and rising costs.  

Similarly, the S&P Homebuilders Select Industry Index, which tracks a basket of names in the space, has also underperformed the S&P 500.

Lambert told me homebuilders in 2023 benefitted from muted turnover in the resale market, which typically presents stiff competition for builders. As a result, homebuilders were able to keep profit margins above pre-pandemic levels. 

Now, however, the housing market’s historic unaffordability is taking its toll. 

Inventory remains tight, and homes are expensive and unaffordable for most Americans. Despite elevated mortgage rates and a cooling economy, national home prices in April hit a record high, according to the CoreLogic Case-Shiller home price index. 

At the same time, the National Association of Realtors April affordability index hovers near a two-decade low. Meanwhile, property insurance, maintenance costs, and real estate taxes continue to march higher, according to data from Bank of America.

Homebuilders have tried to offset these macro headwinds with incentives like buydowns and building smaller homes, though they haven’t yielded the same outsized stock performance as before.

“For now, Wall Street is in wait-and-see mode with builders,” Lambert said, “waiting to see if rising inventory eventually causes builders to up their incentives, thus compressing margins.”