Stock Market Insights: Homebuilders under pressure, adapting to a tough market

Dr. Richard Baker, AIF®, is the CEO and executive wealth advisor at Fervent Wealth Management.

Watching my daughter and her new husband work on their first home is exciting. It is a 65-year-old house, but it is a great fixer-upper. Homeownership is still a cornerstone of the American dream.

Now that the largest publicly traded homebuilders have reported quarterly earnings, I thought it might be a good time to check in on this part of the market and what it might mean to local homebuilders as well.

The industry's “Big 4” S&P 500 Homebuilding Index (D.R. Horton, Lennar Corp, PulteGroup Inc., and NVR Inc.) has seen its stocks drop 34% from its October 2024 peak, which is much worse than the S&P 500’s drop of 3.8% over the same period. The commentary from these companies' earnings calls shows that economic uncertainty and high mortgage rates are causing them problems, but surprisingly, tariffs aren’t expected to be impactful this year.

Homebuilder commentary on tariffs

Regarding tariffs, Pulte said its gross margin was expected to decrease by 1% in the last half of the year as tariff prices increased. While D.R. Horton noted that it didn’t expect any tariff impact on profitability in 2025, but if the tariffs are still in place, they could hurt in 2026.

Approximately 20% of the U.S. lumber comes from Canada, but these big homebuilders felt they could maneuver to U.S. lumber if tariffs came into play. The leadership teams for the big four homebuilding companies didn’t blame tariffs for their slowdown. Their biggest headwinds are affordability and overall buyer uncertainty.

Affordability and uncertainty

Affordability, particularly around high mortgage rates, and buyers' uncertainty remain the main reasons for slower home sales.  Current homeowners are reluctant to give up their low mortgage rates, and first-time home buyers fear they can’t afford a mortgage payment with today'srates.

Another significant headwind is uncertainty. The homebuilding business goes in cycles, and when Americans are uncertain about the overall economy, they are reluctant to make large financial decisions like buying a home with a long mortgage.

Homebuilders have been here before

Economic uncertainty, high interest rates and higher costs (“labor, lumber and bricks, oh my!”) are all serious difficulties facing homebuilders. However, builders have been in this situation before and are good at navigating these cycles.

I was speaking with one of my oldest friends recently, who is a homebuilder who typically builds four-five houses a year. Like the big homebuilding companies, he isn’t affected by tariffs yet, but his biggest problem is high mortgage rates. My buddy Don, who typically builds 400-600 thousand dollar houses, will now focus on small 1,000 sq. ft. houses that will sell in the 160k range, which he thinks will attract first-timebuyers and those wanting to downsize. He will have to lower his margins to make them this affordable, meaning he will have to build twice as many homes a year as in previous years to maintain his overall profit.

The ace in the hole for builders is that they know there is a huge shortfall in homes in the U.S. The U.S. Chamber of Commerce released its “The State of Housing in America” report in late March, saying there is currently a shortage of over 4.5 million homes in America. This gives homebuilders confidence that there will be long-term housing demand, and it offers buyers hope that most builders will stay in the business to keep prices down when they are ready to buy.

Having had two houses built, I agree that a great way to test a marriage is to go through the house-building process. Maybe I am a slow learner, but I finally learned on the second one to agree with whatever my wife wanted, which in the end made my life a lot easier. Hopefully, more Americans will get the opportunity to learn lessons through homeownership soon. I'm keeping my fingers crossed that mortgage rates will fall soon.

Have a blessed week!

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Opinions voiced above are for general information only and not intended as specific advice or recommendations for any person. All performance cited is historical and is no guarantee of future results. All indices are unmanaged and may not be invested directly.

The economic forecast outlined in this material may not develop as predicted and there can be no guarantee that the strategies promoted will be successful.

Fervent Wealth Management is a financial management and services entity in Springfield, Missouri.