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Will the Buffett Effect Lift Homebuilders Amid Mortgage Woes?

The U.S. housing market has shown immense improvement this year buoyed by solid demand for housing, lack of existing inventory and gradual improvements in supply chains. However, higher mortgage rates are dampening housing market activity lately.

High Mortgage Rates a Concern?

Mortgage rates have touched their highest level in more than two decades. According to the latest Freddie Mac's release, the average rate for the 30-year fixed mortgage climbed to 7.09% — the highest point since the first week of April 2002.  This is just the third time rates have exceeded 7% since then. Rates are higher than 5.13% recorded in the year-ago period.

The increase in rates coupled with a near-record surge in home prices has made home ownership more expensive for first-time buyers, discouraging people from buying homes. The surge came following the rise in yields propelled by a series of interest rate hikes from the Federal Reserve. Further increases in interest rates will continue to weigh on prospective buyers and homeowners looking to finance. The central bank seems unlikely to ease monetary policy anytime soon.

Against this backdrop, U.S. homebuilder confidence weakened in August for the first time this year. The National Association of Home Builders/Wells Fargo Housing Market Index dropped to 50 in August from a 13-month peak of 56 in July. According to the NAHB chair and a homebuilder and developer from Birmingham, Alabama, “rising mortgage rates and high construction costs stemming from a dearth of construction workers, a lack of buildable lots and ongoing shortages of distribution transformers put a chill on builder sentiment in August.”

Buffett’s Big Bet Signals Optimism

Warren Buffett is betting big on the U.S. housing market. Per the latest 13F filing, the legendary investor introduced new stakes in D.R. Horton DHI, NVR Inc NVR and Lennar Corp LEN during the second quarter. Warren Buffett invested $814 million across three home builders. He primarily focused on D.R. Horton, purchasing six million shares in the company, worth roughly $726 million at the end of the second quarter. Berkshire purchased more than 152,000 shares in Lennar and 11,000 shares in NVR.

DHI and LEN currently have a Zacks Rank #1 (Strong Buy) each and NVR has a Zacks Rank #2 (Buy), indicating their outperformance in the weeks ahead. These are also considered to be good value picks as they have a solid Value Score of B each. You can see the complete list of today’s Zacks #1 Rank stocks here.

The billionaire’s move indicates the resilience and potential of the U.S. housing market and could be a bullish sign. Historically, when Berkshire Hathaway takes a position in a sector, it often leads to increased investor interest and, sometimes, a rally in the associated stocks.

While the housing market is struggling with higher mortgage rates, Buffett's bet suggests more opportunities for homebuilders than threats.

Other Solid Trends

New home construction has picked up in recent months, with housing starts rising 3.9% to 1.452 million units in July. Low inventory in the existing home market continued to boost interest in new homes. Further, with the rise in remote work culture, a large number of employees are seeking larger homes or relocating to areas with a lower cost of living.

The homebuilding sector belongs to a solid industry, which is placed in the top 2% in terms of ranking among more than 250 Zacks industries.

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