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While Trump and Biden differ in broader policy, neither candidate’s platforms appear likely to quell the robust housing demand that elevated builder stocks through the summer and early fall. (Photo by Bruce Bennett/Getty Images)
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Home builders have seen a strong run over the past four years—and the outcome of the election might do little to change that. While President Donald Trump and former Vice President Joe Biden differ in broader policy, neither candidate’s platforms appear likely to quell the robust housing demand that elevated builder stocks through the summer and early fall.
Since Trump’s inauguration, the four public builders with the largest market caps—
D.R. Horton
(ticker: DHI),
Lennar
(LEN),
NVR
(NVR), and
PulteGroup
(PHM)—gained an average of about 122%, compared to the
S&P 500’s
50%. The
SPDR S&P Homebuilders ETF
(XHB), a fund that tracks home builders and related industries, has gained 60% over the same period.
More than any specific housing policy, that run largely has to do with mortgage rates. The 10-year Treasury yield increased following President Trump’s election on the assumption that the economy would expand, which pushed mortgage rates higher. That lead to strong business for home builders as consumers rushed to try to beat rising rates, says Carl Reichardt, managing director of equity research at BTIG. “Expectations were low in the stocks and business got better than those expectations.” At the same time, builders began to respond to a lack of entry-level housing supply by building smaller homes at lower price points, Reichardt adds, to take advantage of a gap in supply in the resale market.
When the pandemic hit, the Federal Reserve’s actions in response to the crisis helped drive mortgage rates to historic lows, making buying a home less expensive. Following a steep descent at the onset of the crisis, builder stocks have since rebounded, with many reaching new all-time highs over the summer or earlier this fall amid high buyer interest.
Because of these stocks’ reliance on low rates, it’s unlikely either candidate will impact the industry more than long-term Treasury yields. While Treasuries could be in for a volatile ride, the Fed has indicated it intends to keep interest rates low at least through 2022. The Mortgage Bankers Association’s latest forecast foresees the average 30-year fixed-rate mortgage ending 2020 at 3%, rising to 3.3% in 2021 and 3.6% in 2022. Current Federal Reserve chairman Jerome Powell’s term ends in February 2022, and it is unclear how a Biden presidency would move to fill the chair, or if Trump would replace his pick for the central bank.
If Biden wins and Democrats secure a majority in both chambers of Congress, analysts have focused on the potential impact of a proposed tax credit by his campaign for first-time home buyers worth up to $15,000. The credit would build off a similar credit for first-time buyers enacted amid the 2008-09 financial crisis. Unlike the previous tax credit, home buyers would receive the new credit at the time of purchase, instead of receiving a tax credit the following year, according to the Biden campaign.
Susquehanna analyst Jack Micenko writes that new home sales experienced an uptick under that tax credit. “Assuming a similar impact, Biden’s homebuyer tax credit could provide a multi-year industry tailwind for our coverage universe,” Micenko wrote in a note earlier this month. “Homebuilders are likely the biggest beneficiaries of this as most have pivoted their business to serve this growing segment of the market.”
The credit could help builders like D.R. Horton and
KB Home
(KBH) in particular, two builders that specialize in first-time buyers, Raymond James analysts write in a note from early October. The analysts say the first-time buyer tax credit could “turbo-charge demand for the 2021 spring selling season.”
D.R. Horton, the largest public builder in the U.S. by market capitalization, trades at about 2.3 times book value, a relatively pricey valuation compared to its peers. (Lennar, its next-largest competitor, trades around 1.4 times book.) But there are reasons investors are paying a premium for the stock: among them, the fact that first-timers represent 57% of the closings processed by the company’s mortgage segment in the third quarter.
KB Home has a smaller market cap, but its business caters to an even larger share of new homeowners. First-time buyers comprised 64% of its orders in the third quarter. The California-based builder, which focuses on the West Coast real estate market, trades at 1.3 times book value.
While a first-time home buyer credit could help buyers with affordability, it might not offer builders an additional boost when demand is already robust. “As good as Biden’s tax plan might be to juice demand, it’s not what the housing market needs,” says Ivy Zelman, CEO of Zelman & Associates. Demand is not the problem, she says, but a bottleneck in bringing land to market.
In a high-demand environment, the credit could strain builder capacity further, extending the time it takes for a home to be completed, says Wedbush analyst Jay McCanless. Such a scenario is not ideal for buyers, who would have to wait longer to get a house, or builders, who would be forced to take on more risk with regard to future material and labor prices. “I don’t think the builders have to have enough additional capacity to take on a huge surge in closings,” McCanless says.
Under a second term for Trump,
Toll Brothers
(TOL) could stand to gain the most because the company caters to the luxury real estate market, analysts said. As of Toll Brothers’ last quarter, the company’s average selling price for new orders was $782,000—significantly above that of its peers. As Barron’s highlighted earlier this year, Toll Brothers stood to benefit from a robust resale market. With supply still constrained and home prices continuing to rise, the builder could remain in demand among high-end home buyers trading up. “The resale market is so hot that our core client isn’t worried about selling their home,” Toll Brothers CEO Doug Yearley told Barron’s in August.
The builder could potentially benefit from an increase in total income among the nation’s top earners, too. “Status quo scenarios would likely favor additional tax cuts and extensions of capital gains benefits that would benefit upper-income households,” the Raymond James analysts write.
Still, neither outcome should be an immediate concern to investors. Robust housing demand is probably one of the least-pressing issues for the president right now.
Email: Shaina Mishkin at [email protected]
