Homebuilders in Freefall: Bargain Opportunity or Falling Knife?

Key Points

• The SPDR S&P Homebuilders ETF (XHB) has entered bear market territory, down nearly 24% from its 52-week high.
• Rising financing costs, supply chain issues, and new tariffs have weighed heavily on the sector.
• PulteGroup (PHM) has dropped 32% from its high but offers strong financials, a low P/E ratio (6.91), and a solid backlog of orders.

The homebuilders sector has recently come under significant pressure, with the SPDR S&P Homebuilders ETF NYSEARCA: XHB officially entering bear market territory.

At the start of this week, the ETF is down nearly 24% from its 52-week high and over 8% year-to-date (YTD).

With the sector ETF now trading at levels not seen since early 2024, investors may wonder if this extreme correction presents a compelling buying opportunity.

Two upcoming catalysts—interest rate guidance and housing starts data—could provide clarity. Until then, the market may remain cautious but reactive.

Challenges Driving the Homebuilders' Sell-Off

The homebuilders sector’s downturn in 2025 reflects a mix of macroeconomic and industry-specific challenges. Elevated financing costs due to persistently high interest rates, ongoing supply chain disruptions, and looming tariffs on key materials like lumber, steel, and aluminum have significantly pressured margins.

The National Association of Home Builders (NAHB) estimates that recent tariff actions alone could add $9,200 to the cost of constructing a typical home. Coupled with labor shortages and limited buildable land, sentiment in the sector has soured, as reflected in the NAHB/Wells Fargo Housing Market Index dropping to 39 in March 2025, a seven-month low.

Meanwhile, broader housing market trends present a mixed picture. Median new home prices have risen roughly 5% year-over-year through February 2025 due to tight inventory and resilient demand. Likely due to a resilient labor market, sales of existing homes rose to 4.26 million on a seasonally adjusted annualized basis between January and February. 

However, new home sales, which rose 3.6% in December 2024 to an annualized 698,000 units, have stalled in early 2025 as affordability concerns mount. Pending home sales data for February 2025 showed a modest 2.0% month-over-month increase, but the index remains down 3.6% year-over-year, highlighting continued buyer hesitancy amid high borrowing costs.

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Given the steep decline across the sector, however, the weakening sentiment and headwinds might have been priced in, making this a potential opportunity for long-term buyers.

As the sector faces significant headwinds, several of XHB’s top holdings are trading at attractive valuations. PulteGroup NYSE: PHM stands out as a potential long-term value play.

PulteGroup: A Deep Value Opportunity?

PulteGroup, which focuses on residential home construction across the U.S., has experienced a sharp sell-off, with shares now down nearly 32% from their 52-week high and 6.5% YTD. While downward pressure could persist, PHM’s valuation metrics have become increasingly appealing. The stock trades at a 6.91 P/E ratio and a forward P/E of 7.45, indicating expectations of weaker earnings ahead but still reflecting deep value. It also has a modest dividend yield of 0.86%.

Previously, in January, the company delivered a strong Q4 2024, with earnings per share (EPS) of $4.43, exceeding the estimate of $3.21. Home sale revenues grew 13% year-over-year to $4.7 billion, driven by a 6% increase in closings (8,103 homes) and a 6% rise in average selling price to $581,000. Net new orders rose 4% to 6,167 homes, valued at $3.5 billion, indicating sustained demand.

The company expanded its repurchase authorization by $1.5 billion to $2.1 billion, showcasing financial strength with a debt-to-capital ratio of 11.8%. The backlog stood at 10,153 homes, valued at $6.5 billion, positioning PHM well despite a challenging housing market.

PulteGroup’s upcoming earnings report, scheduled for April 22, will provide additional insights into the company’s ability to navigate the current housing cycle and climate. Despite near-term uncertainty, analysts remain optimistic, maintaining a Moderate Buy rating based on 17 ratings, with a consensus price target implying 38% upside potential.

With the sector trading at multi-year lows and homebuilders adjusting strategies to weather the downturn, now may be an opportune moment for investors to examine select names positioned for long-term resilience.