Shareholder returns for leading homebuilders DR Horton and Lennar outperformed the broader S&P 500 between August 2014 and August 2024. Analysts downgraded both companies' investment prospects this summer, but some investors remain optimistic about the industry's performance prospects.
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Performance of DR Horton (DHI) and Lennar (LEN) against the S&P500.
Industry observers say that the market position of leading homebuilders has grown since the 2007/08 financial crisis.
“Many of them received a massive liquidity boost from stimulus packages in the early 2010s,” says Luis Quintero, a lecturer at the Carey School of Business at Johns Hopkins University. “And they were able to use those resources as they pleased.”
Quintero's research suggests that reduced competition among homebuilders could contribute to the housing shortage in the United States.
Supply bottlenecks slow down housing construction
To slow the recent rise in housing prices, the United States would need to rapidly build millions of new homes.
“The supply shortage we estimate [is] somewhere between 2 [million] to 8 million. Some people estimate that we are even 20 million housing units short,” said Tobias Peter, co-director of the Housing Center at the American Enterprise Institute.
Some experts say the long-term shortage is partly due to the permitting process, which can slow down projects in areas with restrictive zoning laws.
Margaret Whelan, founder and managing director of Whelan Advisory, said areas with more open space and looser regulations were seeing more home sales.
“A land decision in California can take decades, unlike in Texas,” Whelan said. “The money goes further.”
The number of permits and construction starts for new residential projects has fallen below the highs recorded in 2021 as high mortgage rates, in addition to rapid home price inflation, continue to keep many potential buyers out of the market.
Zoning proposals for the 2024 election
Vice President Kamala Harris and former President Donald Trump have differing views on zoning reform that could impact the pace of housing construction.
During the election campaign, Harris called on local governments to relax restrictive zoning laws that limit the number of permits for new construction. Her program includes subsidies for some Developers who will contribute to the construction of three million new homes by the end of the next presidential term.
“We will end America’s housing crisis,” Vice President Harris said on the final evening of the Democratic Party Convention.
Former President Trump called for an end to the Biden administration's efforts to increase residential density in suburban areas. Trump also criticized the administration for the current inflation situation, which has affected key costs, including housing.
“Young people can’t get financing to buy a home,” former President Trump said at the Republican National Convention in July.
Watch the video above to learn more about what is slowing home construction in the US