Shares in US homebuilders have surged to record highs, surpassing levels hit during the housing bubble more than a decade ago, as rock-bottom interest rates spur Americans to buy new homes.
The Dow Jones Home Construction index, an $80bn benchmark, is up 29 per cent this year, eclipsing the 6 per cent rise in the broader S&P 500. The rally has propelled the housing benchmark past its peak set during the subprime bubble in 2005, which led to the financial crisis years later.
The four largest homebuilders in the S&P 500 — DR Horton, Lennar, NVR and PulteGroup — all hit record highs this month, placing them among a rare number of companies in the index that have matched the market’s recent peak.
DR Horton, the largest listed US homebuilder, recorded the highest net sales in its history in the June quarter. The company’s stock has gained 44 per cent this year, outpacing the likes of Microsoft and Google, which are among the tech giants powering the S&P 500’s rally.
“Inventories are low and prices seem to be moving up,” said Stephen Stanley, chief economist at Amherst Pierpont. “That bodes well for homebuilders — it will take a while for them to catch up.”
Home buying has rebounded strongly after a drop in activity following the outbreak of coronavirus. New home sales in July reached 901,000, the highest tally since 2006, according to data released on Tuesday. Existing home sales in the US have also returned to levels previously seen more than a decade ago, according to July data released last week.
The big driver behind this jump in sales is the swift fall in US interest rates. The US Federal Reserve cut rates to nearly zero in March as part of sweeping crisis measures, a move that dragged the US 30-year mortgage rate below 3 per cent for the first time last month.
The difference between current mortgage rates and the near-zero yields on US government debt will probably push lending rates even lower, said Hugo Rogers, chief investment strategist for Deltec. “We expect these historically low [mortgage] rates to still fall further.”
Low rates have taken some of the sting out of a doubling in the price of lumber this year, which has increased building costs.
Shifts in demographics have also helped to spur the sales boom. Millennials, a group hit hard by the financial crisis, are now in the market for first-home purchases, while baby boomers are downsizing from family homes into smaller dwellings.
The health crisis has had an impact on the housing market, analysts noted, with flexible working arrangements allowing people to forgo commutes.
“We are hearing that a lot of people are looking for larger homes in less densely populated areas because of the pandemic,” said Nancy Vanden Houten, lead US economist at Oxford Economics.
The rosy outlook for sales was reflected in the National Association of Home Builders’ housing market index, which rose 6 points to 78 in August, the highest reading in its 35-year history, which matched its 1998 record.
A sharp increase in unemployment has failed to dent the buying spree. The hit to jobs has been most acute in the service sector, sparing white-collar workers who may be closer to buying a home, said Jonathan Woloshin, head of US real estate for UBS’s wealth management business.
A fresh surge in coronavirus cases nationwide could temper the boom, but for now the outlook underpinning the rally appears to be strong, Mr Woloshin said. “Without a doubt there are definitely forces that can further propel sales,” he said.