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Why These Homebuilders' Stocks Jumped More Than 25% in April

By John Bromels – Updated May 8, 2020 at 9:44AM

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Despite a collapse in sales, optimism has returned to the housing market.

What happened

Shares of residential homebuilders D.R. Horton (DHI -1.05%)Lennar (LEN -0.31%), and PulteGroup (PHM -0.98%) rose more than 25% in April, according to data provided by S&P Global Market Intelligence. Horton's share price improved the most, jumping 38.9% during the month. Lennar saw its shares rise 31.1%, while PulteGroup trailed with a 26.7% gain.

Homebuilders have fared better than many companies in 2020. Shares of Horton and Lennar are actually outperforming the market, with respective year-to-date price declines of 8.9% and 10.5%, compared to the S&P 500's 10.9% loss. PulteGroup is again the laggard, with shares down 27.4% for the year despite a first-quarter earnings beat.

The wooden frame of a house under construction.

Image source: Getty Images.

So what

Homebuilders' outperformance isn't surprising, under the circumstances. A warm winter and low mortgage rates helped juice sales through January and February. While the overall housing market stalled in late March as coronavirus concerns caused sellers to pull their homes from the market, it was late enough in the quarter for most homebuilders to post respectable Q1 earnings anyway. 

More recent data has been mixed, but industry groups are cautiously optimistic. In a recent press release, National Association of Realtors Chief Economist Lawrence Yun predicted that sales haven't so much been canceled as pushed back to later in the year.

"The housing market is temporarily grappling with the coronavirus-induced shutdown, which pulled down new listings and new contracts," he said. "As consumers become more accustomed to social distancing protocols, and with the economy slowly and safely reopening, listings and buying activity will resume, especially given the record low mortgage rates."

Yun is correct that mortgage rates are at all-time lows. For the week ending May 1, the standard 30-year fixed mortgage rate fell to a rock-bottom 3.23% from 3.29%; that's the lowest rate ever recorded. Some data seems to support the theory that buyers are ready to rush back into the market. Early May survey data from the Mortgage Bankers' Association indicated that the volume of purchase loans had increased for three straight weeks, which it said was a sign of "pent-up demand." 

Investors, cheered by this news, have bid up homebuilders' share prices.

Now what

Although Yun is bullish on a swift recovery in the housing market, he's realistic about what a months-long hiatus will mean for the industry.

"The usual spring buying season will be missed ... so a bounce-back later in the year will be insufficient to make up for the loss of sales in the second quarter," he said. "Overall, home sales are projected to have declined 14% for the year."

Other investors are concerned about lending. The federal government's COVID-19 response package -- known as the CARES Act -- allowed borrowers affected by the coronavirus to delay government-backed mortgage payments by up to a year in a process known as forbearance. Because more than 90% of U.S. mortgages are backed by government agencies Fannie Mae, Freddie Mac, and Ginnie Mae, many borrowers became eligible.

According to data analytics company Black Knight, 3.8 million borrowers were in forbearance at the beginning of May, representing 7.3% of all mortgages. The prospect of having borrowers enter forbearance, coupled with massive job losses that could lead to outright loan defaults, has prompted mortgage lenders to tighten their standards. The Mortgage Credit Availability Index has fallen to its lowest level since June 2015, so even though mortgage rates are low, people may still have trouble getting approved. 

That's especially true for first-time homebuyers looking for starter homes, which have been the bread and butter for homebuilders in recent years. If demand dries up for these smaller homes, it could have a negative impact on residential construction companies like Horton, Lennar, and PulteGroup.

While many observers are cautiously optimistic about the housing market in general and residential homebuilders in particular, investors will probably want to proceed with caution until a clearer picture unfolds.

John Bromels has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

D.R. Horton, Inc. Stock Quote
D.R. Horton, Inc.
$67.52 (-1.05%) $0.72
Lennar Corporation Stock Quote
Lennar Corporation
$73.47 (-0.31%) $0.23
PulteGroup, Inc. Stock Quote
PulteGroup, Inc.
$37.54 (-0.98%) $0.37

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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