AI or Buffett-Backed Homebuilder - Who Will Be the Winner Amid High Rate Headwind?
Although Wall Street faces a multitude of concerns such as a potential recession, interest rate hikes, sticky inflation, and a declining US economy, there is one area of the market that continues to fuel investor optimism: artificial intelligence.
However, the market's strength has been mostly driven by a handful of mega-cap tech stocks, $Alphabet-A(GOOGL.US$, $Meta Platforms(META.US$, $Apple(AAPL.US$, $Amazon(AMZN.US$, and $NVIDIA(NVDA.US$. That's why the tech-heavy $Nasdaq Composite Index(.IXIC.US$ and the $S&P 500 Index(.SPX.US$ are so much higher this year than the $Dow Jones Industrial Average(.DJI.US$.
For more seasoned investors, these soaring tech stock prices may be reminiscent of the dot-com bubble of the early 2000s. In equities markets, bubbles happen when overvalued assets soar to unsustainable highs before the bubble "pops" and prices fall back down to Earth. But overall, many market watchers say AI stocks likely aren't in a bubble headed for a pop.
While investment themes like artificial intelligence (AI) have grabbed much of the attention of investors this year, homebuilders have sneakily outperformed the $S&P 500 Index(.SPX.US$ year to date. That news may be surprising to some, especially when you consider that the U.S. has been in a housing recession over the past year.
Warren Buffett's $Berkshire Hathaway-A(BRK.A.US$ $Berkshire Hathaway-B(BRK.B.US$ recently released an SEC Form 13F, which shows its trading actions in the second quarter. The form indicates that Buffett (through Berkshire) opened new positions in three different homebuilders: $D.R. Horton(DHI.US$, $Lennar Corp(LEN.US$, and $NVR Inc(NVR.US$.
The housing economy has been beset by headwinds stemming from the massive increase in interest rates over the past year. Existing home sales have collapsed, mortgage origination is a fraction of what it was a couple of years ago, and home price appreciation peaked a year ago. Yet, if you compare the $SPDR S&P Homebuilders ETF(XHB.US$ versus the S&P 500, it has outperformed year to date.
In June 2023, new home sales experienced a significant increase of 23.8% in comparison to the sales recorded in June 2022. However, existing home sales dropped by 18.9% when compared to the previous year. The primary reason for this substantial contrast is the impact of the interest rate lock-in effect. As mortgage rates currently exceed 7%, many homeowners are hesitant to sell their properties as they wish to maintain their current low 3.5% mortgage rate, resulting in a decrease in the inventory of homes for sale. This phenomenon is commonly referred to as "hate the house, love the mortgage," which ultimately creates an opportunity for builders who do not have to deal with sellers unwilling to give up their lower rates.
The stock prices of the builders have begun to price in a major recovery in homebuilding, and the divergence between new home sales and existing home sales shows that new homes are where the momentum resides. Buffett is betting that the long-awaited housing boom is upon us. With a bit of additional research, this might be a bet that investors want to make as well.
However, both ETFs show typical double-top patterns now, which are bearish technical reversal patterns that signal a possible end of a bullish market.
Mooers, which do you think will be the winner amid high-rate headwind, AI or homebuilder?
Source: Bloomberg, The Motley Fool, Money
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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