Wall Street sees a solid year ahead for homebuilders, though mortgage rates remain a wildcard

Housing market trends are shaping up in favor of a solid 2024 for U.S. homebuilders — as long as mortgage rates don’t jump back to the highs they hit late last year.

Sales of new homes rose nationally in 2023 for the first time in two years, climbing 4.2% from a year earlier, according to the Commerce Department. This bucked the trajectory of the broader housing market, which remained mired in a deep slump as sales of previously occupied U.S. homes sank roughly 19% to a nearly 30-year low.

Homebuilders were able to mitigate the impact of higher interest rates on home shoppers by lowering prices and offering incentives like paying buyers’ closing costs or buying down the rate on their mortgage. They also benefited from a chronically low inventory of existing homes on the market.

Those market trends are expected to help give homebuilders a leg up again this year, Wall Street analysts say.

Moody’s Investors Service projects that new U.S. home sales will increase 5% in 2024, citing strong demand among millennials and a healthy job market.

The new-home market’s “healthy fundamentals should result in a solid year for U.S. homebuilders,” the Moody’s analysts wrote in the report released this week.

Underpinning much of the optimism are expectations that mortgage rates will continue to decline this year.

Moody’s forecasts that the average rate on a 30-year fixed mortgage will drop to 6.4% by the fourth quarter. Forecasts by several housing economists see the average rate declining this year, though generally no lower than 6%.

The average rate on a 30-year mortgage has eased since reaching a 23-year high of 7.79% in late October. But rates have been creeping higher in recent weeks as stronger-than-expected reports on inflation and the economy have stoked worries among bond investors that the Federal Reserve will wait longer than anticipated before it begins cutting interest rates.

While higher rates are not good for homebuilders, they can still fall back on incentives to help spur sales as they did last year, said Carl Reichardt, a homebuilding analyst at BTIG,

“My expectation for 2024, which is very modest growth in new home sales, really comes from a stabilization in interest rates and continued lack of competition from existing homes,” he said.

Wall Street has cheered how homebuilders adapted to a rocky housing market last year. Shares in PulteGroup, Lennar and most other U.S. homebuilders are up substantially over the past 12 months. One prominent exchange traded fund, the SPDR S&P Homebuilders ETF, is up roughly 48% in the same period, while the benchmark S&P 500 index is up nearly 25%.

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