US homebuilders are experiencing a decline in sentiment due to the onset of the cold winter season. However, despite this negative sentiment, the housing market's underlying fundamentals remain strong, presenting potential investment opportunities.
In the last quarter of 2022, homebuilder and building product stocks performed poorly compared to the broader market. Homebuilder stocks declined by 23% and building product distributors fell by 16%, while the overall market saw a modest gain of 2%.
The increase in mortgage rates has contributed to the negative sentiment among builders, raising concerns about affordability for potential homebuyers. Nevertheless, UBS analysts believe that the current pessimism in the market presents buying opportunities for investors. UBS has a positive outlook on the homebuilding sector, particularly for public builders who are well-positioned to gain market share from smaller competitors. These public builders can leverage the tight existing home inventory across the country and offer mortgage rate buydowns to enhance affordability for buyers.
The fourth quarter of 2022 was challenging for homebuilders, with elevated incentive activity that may impact gross margins. However, UBS expects builders to navigate the higher rate environment effectively, as they have in previous years.
The outlook for building products and distributors is mixed, with anticipated growth in repair and remodel activities driven by an increase in existing home sales and pent-up demand. However, challenges such as consumer debt levels and potential tariffs may impact these sectors. Despite these challenges, the building products sector is expected to play a crucial role in the rebuilding efforts following the fires in Louisiana.
Overall, while sentiment among US homebuilders is negative, the housing market's fundamentals remain strong, presenting opportunities for investors.