As most of the large cap homebuilders have reported quarterly earnings, we think it’s a good time to check in on the industry, and whether the sell-off fully reflects the near-term headwinds they are facing. The “Big 4” S&P 500 Homebuilding Index (D.R. Horton (DHI), Lennar Corp (LEN), PulteGroup Inc. (PHM), and NVR Inc. (NVR)) is down 34% from its October 2024 peak and 11% year to date (YTD); relative to the S&P 500, which is down 3.8% and 6.2% over the same periods, respectively. Earnings call commentary from management teams over the past few weeks has provided investors with a view into the macroeconomic uncertainty facing the industry, and how companies are adjusting plans (where they can) to weather the current storm.

 

While first quarter (Q1) earnings results were mixed, management guidance has been consistently revised lower, both from a volume and gross profit perspective. Management teams have called out economic uncertainty and affordability as the primary contributors to the lowered full-year expectations, and many speak to the tradeoff between “pace and price”, i.e., sacrifice margins to maintain volume growth, or suffer slower/declining unit growth while maintaining margins. Most of the large operators analyzed leaned slightly toward price and maintaining returns on capital.

 

Homebuilder Commentary on Trade Policy

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With respect to tariffs, Pulte (PHM) noted that their reduced gross margin expectation in the 2nd half of the year included an estimated 1% (~$5,000) average increase in unit costs due to tariffs. D.R. Horton (DHI) noted that they wouldn’t expect any tariff impact on profitability in fiscal 2025 (ending September), but tariffs would impact profitability in fiscal 2026 if still in place. Approximately 20% of their current supply of lumber comes from Canada, but they would look to adjust that if current tariff rates remain in place. Given the uncertainty around trade policy, management teams did not outwardly attribute subdued sales outlooks to tariffs, and only a small amount of margin pressure was attributed to trade policy.

 

Affordability, particularly around mortgage rates, and economic uncertainty among buyers remain the most cited reasons for the reduction in guidance across homebuilders. Mortgage rates are a lever that homebuilders can use to sustain sales via (margin eroding) rate buydowns. Taken together, analyst estimates for calendar 2025 sales and earnings during the current earnings season have come down approximately 5% and 10%, respectively. Year-to-date, calendar year (CY) 2025 estimates have come down 8% and 18% respectively, highlighted in the “Calendar Year 2025 Homebuilder Consensus Estimates Revisions” chart.

 

Calendar Year 2025 Homebuilder Consensus Estimates Revisions

• Source: LPL Research, Bloomberg 04/28/25
• Disclosures: Past performance is no guarantee of future results.

 

What can homebuilders do from here? The homebuilding industry is very cyclical, and when the economic outlook is uncertain, large financial decisions like purchasing a home with a 30-year mortgage slow down. Homebuilders responded by slowing investment in land development. PHM reduced their expected investment in land acquisition and development to $5.0 billion in 2025, down from prior expectations of $5.5 billion, and the 2024 total of $5.3 billion. While just one data point, management teams are prudently adjusting investment plans for a slowdown, in line with the reduction in earnings expectations.

 

Homebuilder Valuations Fair – With No Recession

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For homebuilders, price to book value (P/B) is generally the valuation multiple investors focus on. An adage of investing in homebuilders is “buy at 1x book, sell at 2x book”. That buy low, sell high strategy certainly sounds logical, and heuristics such as these are the unwritten rules of the game for stock operators. However, these companies have become more operationally efficient and less capital-intensive. While book values may still be an appropriate valuation yardstick, the levels may need to be revisited. In the “S&P 500 Homebuilding Index Forward One Year Price to Book Ratios” chart, we have plotted the last 10 years of weekly index-level P/B multiples, and overlaid the average over this period, as well as trading ranges defined by +/- 1 and +/- 2 standard deviations to that average. The builders are currently trading at about 1.6x forward one-year estimates of book value and have traded at an average 1.7x forward one-year estimates of book value over the trailing 10 years. Valuations seem fair given the slowdown in sales and margins, but downside risk remains if economic conditions worsen, and the U.S. enters a recession.

 

S&P 500 Homebuilding Index Forward One-Year Price-to-Book Ratios

• Source: LPL Research, Bloomberg 04/28/25
• Disclosures: Past performance is no guarantee of future results. All indexes are unmanaged and can’t be invested in directly.

 

Cyclical Industries Can Produce Excess Returns — Over the Long-Term

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Uncertainty around economic conditions, interest rates, and supply costs (labor and “sticks and bricks”) are all serious headwinds facing the near-term outlook for homebuilders. However, builders have shown the ability to navigate cycles and steadily improve returns through those cycles. The structural deficit of homes in the U.S. remains high, giving homebuilders confidence in long-term housing demand. This constructive backdrop has served publicly traded homebuilders well and leads to our final chart, one that may surprise you as much as it surprised us. Since April 1990, the total return of the large cap homebuilding industry, measured by the S&P 500 Homebuilding Total Return Index, has outpaced the S&P 500 Total Return Index by approximately 1,400%, or ~1.1% compounded annually.

 

S&P 500 Homebuilding Index vs. S&P 500 (Indexed at 100)

• Source: LPL Research, Bloomberg 04/28/25
• Disclosures: Past performance is no guarantee of future results. All indexes are unmanaged and can’t be invested in directly.

 

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