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Homebuilding Industry Outlook Bright on Low Mortgage Rates

Shrabana Mukherjee
·7 min read

The Zacks Building Products - Home Builders industry comprises manufacturers of residential and commercial buildings. Some of the industry players are involved in providing financial services that include selling mortgages and collecting fees for title insurance agency and closing services.

Notable companies in the industry include Lennar Corporation (LEN), NVR, Inc. (NVR), D.R. Horton, Inc. (DHI), PulteGroup, Inc. (PHM) and Toll Brothers, Inc. (TOL).

Let’s take a look at the industry’s three major themes:

  • The U.S. housing market is witnessing an impressive comeback on major data points post COVID-19-led shutdowns, with home sales rising at a record pace, defying low inventory levels and broad-based economic and public health risks. The fundamentals of this rate-sensitive market, which accounts for almost 3% of the economy, remain favorable given the Fed’s dovish monetary stance and lower mortgage rates. Additionally, the need to rebuild inventories is expected to drive the U.S. housing aggressively.
     

  • Apart from low borrowing costs, the changing geography of housing demand has been supporting builder confidence. Demand for new homes is improving in lower density markets, including small metro areas, rural markets and large metro exurbs, as people seek larger homes to work from home during the pandemic. Furthermore, homebuilders have also been controlling construction costs by designing homes efficiently and obtaining construction materials and labor at competitive prices. Homebuilders are following a dynamic pricing model, which enables it to set price according to the latest market conditions. Meanwhile, industry biggies have been acquiring other homebuilding companies in desirable markets, resulting in improved volumes, revenues and profitability. Again, the companies are focused on growing demand for entry-level homes, addressing the need for lower-priced homes, given the affordability concerns prevailing in the U.S. housing market.
     

  • However, the COVID-19 outbreak and response to the health crisis in various countries are likely to have a lingering impact on the supply chain in the near term, which may impact builders’ ability to deliver in time. Precisely, rising material costs are quite a challenge. According to an Associated Builders and Contractors' analysis of information provided by the U.S. Bureau of Labor Statistics, there may be anecdotal shortages of some inputs as the global supply chain buckles under the coronavirus outbreak. Materials prices are likely to rise on supply chain issues and elevated trade tensions. These rapid increases in prices might have major implications on the industry. Again, shortage of skilled labor continues to be a pressing concern. Homebuilders remain cautiously optimistic about the industry’s prospects owing to rising land and labor costs. Meanwhile, softness in home purchases in the high-end housing market segment, in response to affordability challenges and general market uncertainty, is a cause of concern.


Zacks Industry Rank Indicates Bright Prospects

The Zacks Building Products - Home Builders industry is a 16-stock group within the broader Zacks Construction sector. The industry currently carries a Zacks Industry Rank #14, which places it at the top 2% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates upbeat near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s position in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. Since June 2020, the industry’s earnings estimates for 2020 and 2021 have gone up approximately 18.2% and 20.6%, respectively.

Given the solid near-term prospects, we will present a few stocks that have the potential to outperform the market. But before that, it’s worth taking a look at the industry’s shareholder returns and current valuation.

Industry Outperforms Sector and S&P 500

The Zacks Building Products - Home Builders industry has outperformed the S&P 500 Index and the broader Zacks Construction sector in the past year.

Over this period, the industry has gained 34.6% compared with the S&P 500’s rise of 16.3% and the broader sector’s 22.3% increase.

One-Year Price Performance

Industry’s Current Valuation

On the basis of forward 12-month price-to-earnings (P/E) ratio, which is commonly used for valuing homebuilding stocks, the industry is currently trading at 10.9X compared with the S&P 500’s 22.8X and the sector’s 18.6X.

Over the last five years, the industry has traded as high as 14.4X and as low as 6.3X, with the median at 10.7X, as the chart below shows.

Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500

Bottom Line

Indeed, the U.S. housing space continues to grapple with labor shortage and a dearth of buildable lots. Also, disruption in the supply chain arising from the novel coronavirus outbreak may impact builders’ ability to deliver in time. That said, low mortgage rates and the Fed’s dovish stance should spur home buying activity in the near term.

Currently, we are presenting five top-ranked stocks in the Zacks Building Products - Home Builders industry that are cashing in on the positive industry fundamentals amid the crisis and have bright prospects in the near term.

D.R. Horton, Inc.: This Texas-based company is one of the leading national homebuilders, primarily engaged in the construction and sale of single-family houses, both in the entry-level and move-up markets. The company currently sports a Zacks Rank #1 (Strong Buy) and has an expected earnings growth of 33.6% for the current fiscal year. The Zacks Consensus Estimate for fiscal 2020 and 2021 earnings has moved up 18.6% and 27.8%, respectively, over the past 30 days. You can see the complete list of today’s Zacks #1 Rank stocks here.

Price and Consensus: DHI


M.D.C. Holdings, Inc. (MDC): This company is engages in homebuilding and financial service businesses and currently sports a Zacks Rank #1. The consensus estimate for 2020 and 2021 earnings has moved up 56.9% and 56.2%, respectively, over the past 30 days. The company has an expected earnings growth of 26.1% for the current year.

Price and Consensus: MDC


Meritage Homes Corporation (MTH): This company is a leading designer and builder of single-family homes. This stock also sports a Zacks Rank #1 and its earnings are expected to increase 42.8% in 2020. The Zacks Consensus Estimate for its 2020 and 2021 earnings has risen 50.6% and 55.1%, respectively, over the past 30 days.

Price and Consensus: MTH


M/I Homes, Inc. (MHO): This company is one of nation's leading builders of single family homes. This stock also sports a Zacks Rank #1 and its earnings are expected to increase 36.7% in 2020. The Zacks Consensus Estimate for its 2020 earnings has gone up 91.2% and 90.6%, respectively, over the past 30 days.

Price and Consensus: MHO


TRI Pointe Group, Inc. (TPH): Based in Irvine, CA, this company engages in the design, construction, and sale of single-family detached and attached homes in the United States. This stock also sports a Zacks Rank #1 and the Zacks Consensus Estimate for its 2020 and 2021 earnings has gone up 32% and 26.4%, respectively, over the past 30 days.

Price and Consensus: TPH

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TRI Pointe Group, Inc. (TPH) : Free Stock Analysis Report
 
Toll Brothers Inc. (TOL) : Free Stock Analysis Report
 
PulteGroup, Inc. (PHM) : Free Stock Analysis Report
 
NVR, Inc. (NVR) : Free Stock Analysis Report
 
Meritage Homes Corporation (MTH) : Free Stock Analysis Report
 
MI Homes, Inc. (MHO) : Free Stock Analysis Report
 
M.D.C. Holdings, Inc. (MDC) : Free Stock Analysis Report
 
Lennar Corporation (LEN) : Free Stock Analysis Report
 
D.R. Horton, Inc. (DHI) : Free Stock Analysis Report
 
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