Wall Street's huge homebuilder trade has come to a halt

Housing stocks outperformed the S&P 500 last year, but those gains have since lagged

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Welcome back to Opening Bell Daily. We learned Friday that May’s core PCE index rose 2.57% year-over-year, cooling in line with expectations and supporting the Fed’s case for rate cuts.

The S&P 500 dipped slightly for the week, but the index did touch a record intra-day high on Friday.

Keep an eye for June’s manufacturing data this morning.

On deck today: Why Wall Street’s cooled on housing stocks, Biden’s talks with wealthy donors, and day traders’ new favorite gamble.

The housing trade has fallen out of favor

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 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.”

What’s your housing market outlook for the rest of the year, and how does that impact your view on homebuilder stocks? Hit reply to this email or let me know on X @philrosenn.

*At a glance:

*Premarket data as of Sunday, 7 p.m. ET

Elsewhere:

💰️Joe Biden hit the Hamptons. After his weak debate performance left many Democrats calling for him to step aside, the president and his allies have moved to reassure top backers and investors. He met donors in East Hampton on Saturday, where the cost of entry was as high as $250,000 per person. (FT)

📊The stock market’s set for a wild second half of the year. The S&P 500 has posted 31 records through the first six months of 2024, with mega-cap tech acting like jet fuel. Even as the economy shows cooling, the rally looks set to continue as the Fed readies rate cuts. Historically, a strong first half bodes well for the rest of the year. (Bloomberg)

🃏Zero-dated options are a new favorite gamble on Wall Street. Huge bets on short-term market swings are becoming more popular among risk-seeking investors. These volatile trades account for nearly half of the daily volume of S&P 500 index options, up from 17% in 2020. The lotto-sized payouts are enticing, but “you can go completely broke,” said one quant. (Barron’s)

🎮️GameStop’s devout investors are still bullish. Some traders still say the allure of striking it rich on the meme stock is too great to ignore, despite the potential for steep losses. One 29-year-old retail investor shared that he put $40,000 into GameStop in 2021, watched it go to $200,000, but still ended up selling at a loss. (Business Insider)

Rapid-fire:

  • China’s factory activity contracted for a second consecutive month in June (Bloomberg)

  • Wall Street’s few remaining bears insist that optimistic clients have embraced “fanatical thinking” (FT)

  • Bitcoin is down 13% since March, marking a sharp pullback on the quarter following an ETF-fueled rally (Bloomberg)

  • Nike has warned of weak sales in China, and investors have sent the stock plunging (CNBC)

  • The World Economic Forum, which organizes a popular event in Davos for global leaders, faces allegations of sexual harassment and discrimination (WSJ)

Last thing:

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