A Tale of Two Housing Markets
Ben Laidler | Feb 14, 2024 08:11
HOMEBUILDERS: US homebuilders have outperformed even the NASDAQ in the past year, as limited inventory drove new home sales despite high interest rates. Whilst UK homebuilders have made a recent comeback, with mortgage rates peaked and valuations discounted, after hugely underperforming. US homebuilders counter-intuitively benefit from higher mortgage rates, whilst UK builders need them to keep falling. This transatlantic divergence (see chart) is despite the two’s similarities. Both have high home ownership (65.7% in US and 65.2% in UK), and house prices (US avg. $387,000 vs UK equiv. $357,000). And chronic deficits (only 0.43 US dwellings/person vs 0.45 in the UK), with house prices rising again (5.4% in US vs 2.5% in UK). Housing is the largest expenditure and debt for consumers, and their biggest source of wealth.
US: The SPDR US homebuilders ETF (XHB) has soared 46% the past year. With big builders, like Pulte (PHM) and Lennar (LEN), one of the year’s big surprises. As soaring mortgage rates stopped existing home sales in their tracks. These are 85% the market and at decade lows. Whilst driving up demand for new build. In this light the recent US mortgage rate fall is a mixed blessing. The standard 30-year fixed mortgage peaked at 7.8% in Nov. and has fallen to 6.7%. Whilst underlying valuations are now at a 40% price/book premium of 1.7x versus UK builders.
UK: Our 10-stock UK homebuilders basket, from Taylor Wimpey (LON:TW) and Berkeley (BKGH (LON:BKGH)) down, has lagged the FTSE 100 by 30% the past three years. Though a comeback started late last year. As bond yields fell sharply as interest rate cuts came on horizon, and housing prices quickly firmed. Five year fixed mortgage rates, the most common in the UK market, peaked in November at 5.03% having soared from under 1.5% at the end of 2021. Whilst M&A made a comeback with Barratt (LON:BDEV)’recent all-share 27% premium offer for peer Redrow (LON:RDW).
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