US housebuilders/Home Depot: property paralysis creates haves and have nots

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Warren Buffett’s Berkshire Hathaway has splashed out $814mn for stakes in three US housebuilders: DR Horton, Lennar and NVR. This should not be interpreted as a bet that the deep freeze in US property is thawing. For proof, look at the dip in DIY sales.

A sharp spike in interest and mortgage rates has prompted homeowners to stay put. The supply of houses for sale is low. A healthy market should have four to six months of inventory. At the end of June, the National Association of Realtors said the US had about 3.1 months. Existing home sales, which make up most of the housing market, were down nearly a fifth compared with the year-ago period.

This paralysis has not benefited DIY retailers and home goods related businesses. Home Depot on Tuesday reported a 2 per cent drop in same-store sales in its fiscal second quarter. While better than expected, it marked the third consecutive quarter of year-on-year decline.

Consumers took on more DIY projects during the pandemic, meaning Home Depot is coming up against tough comparatives. Customers are cutting back on big-ticket items like furniture and appliances. Longer term, the company’s focus on professional contractors and better inventory and supply chain management bodes well. This explains why the stock, up 5 per cent this year, trades on about 22 times forward earnings, slightly above three and five year averages.

Median home prices continue to hover near record highs hinting that plenty of pent up demand exists. New builds can capitalise on this. At DR Horton, new orders jumped 37 per cent year-over-year for its most recent quarter. Those at NVR were up by more than a quarter. 

Shares in the five leading homebuilders — DR Horton, Lennar, PulteGroup, Toll Brothers and NVR — all touched new highs this year after climbing between 40 to 90 per cent over the past 12 months, possibly anticipating lower interest rates to come as inflation slows. In a dysfunctional market, Buffett sees an opportunity.