What happened
Homebuilder stocks D.R. Horton (DHI 0.78%) and Lennar (LEN 0.98%) marched higher last month on macroeconomic news that buoyed the housing sector. Thanks to favorable economic indicators and an announcement by the Federal Reserve, D.R. Horton rose 13.9% and Lennar was up 17%, according to S&P Global Market Intelligence.
So what
Lennar reported quarterly earnings in June. Its revenue beat Wall Street's forecasts by roughly 10%, and the company's profits were well above expectations. Lennar also shared a positive outlook for the housing sector, indicating that demand is normalizing after years of disruption.
D.R. Horton didn't have any meaningful news in June, but investors reacted to its peers' earnings, along with important macroeconomic news that corroborated Lennar's forward-looking commentary.
Image source: Getty Images.
The Fed paused its interest rate hikes in June, marking the first period in more than a year in which it maintained interest rates. The central bank has been forced to hike rates to combat inflation, but demand for homes tends to drop quickly when high interest rates increase the cost of borrowing.
The Fed was quick to point out that it expects more rate hikes in coming months, but it looks like we're inching toward an inflection point. That's fueling major optimism in the housing sector.
A few days after the Fed announcement, impressive data on May housing starts and building permits was published. Activity surged higher in May, topping consensus estimates.
U.S. housing starts data by YCharts.
This normalization was achieved despite relatively high interest rates, shaky data on consumer spending, and depressed sales of existing homes. The housing sector could be hurt if a recession hits at some point in the next few quarters, but the data suggests that demand is relatively strong, even with sub-optimal conditions.
As two of the leading residential homebuilders, D.R. Horton and Lennar would be among the largest beneficiaries of that momentum.
Now what
It's hard to guess where the economy is going, especially with the Fed's monetary policy having such a heavy impact on some sectors. D.R. Horton's forward price-to-earnings ratio has risen to 11.5 amid the recent optimism, while Lennar's is just over 9. That's exceptionally cheap compared to most other sectors, but it's closer to the high end of D.R. Horton's historical range. Both stocks pay dividend yields around 1%, so they aren't likely to produce meaningful investment income like other value stocks.
The short term remains uncertain for homebuilders, but they have compelling long-term demand catalysts. Several studies indicate that new household creation has outpaced residential home construction by several million units over the past 15 years. As a result, many investors are confident about the housing sector, regardless of temporary cyclical disruptions.
