One home building stock that's gone under the radar: Analyst

What does falling mortgage rates mean for home builder stocks? Jay McCanless, Housing Analyst at Wedbush Securities, joins Yahoo Finance to discuss why he is less bullish on home builders and to shed light on one under-the-radar stock: Cavco Industries (CVCO).

McCanless illuminates that Cavco "sells affordably priced homes. According to the Manufactured Housing Institute, the average price of a single section home was $70,000 in '22, and $210,000 for a double section home. You compare that where existing home prices are on a median basis at almost $330,000 in the US. Cavco is a name that sells an affordable payment, which is what the manufactured housing buyers are typically looking for. We also think the balance sheet of this company, which is all, a net cash balance sheet, significantly net cash balance sheet, gives them the staying power to weather some of the mortgage rate fluctuations that the manufactured housing market saw in '23, just like the site-built housing market saw."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Nicholas Jacobino

Video Transcript

JOSH LIPTON: I'm interested, Jay. You know, the Fed is expected to cut rates this year. And, you know, I would think, Jay, that's a pretty great, bullish tailwind for this sector just in terms of lifting sales and margins. You know, builders can reduce the incentives. So is your point just simply, OK, that's a tailwind, but it's just simply priced in at these levels?

JAY MCCANLESS: Yeah, I think that's part of it. I think the other side of it is that even though there is the potential for rate cuts out there, in terms of the actual effect on the 30-year mortgage rate, the 30-year mortgage rate has only come down, as of where the numbers are today, only about 100 bips. So homes are slightly more affordable than they were but much more expensive than they were, say, a year ago or even two years ago. And we feel like with, again, the move this group has had, we've priced in a lot of that good news. And if we do see-- and I think probably the risk to our more cautious view is that if mortgage rates do finally start to come down at some point, that will pull more people back in, potentially can make our numbers be a little conservative. But right now with mortgage rates kind of stuck at 7%, just don't see a reason to get overly bullish on the space at this point.

JULIE HYMAN: That said, there are some names that you like within home builders, and one of them is one that I wasn't as familiar with, and, as you point out, it's not as popular. It's a company called Cavco that does factory-made housing. Why is that one more attractive?

JAY MCCANLESS: So Cavco is a name that sells affordably priced homes. According to the Manufactured Housing Institute, the average price of a single-section home was $70,000 last year-- or, sorry, in '22, and $210,000 for a double-section home. You compare that to where existing-home prices are on a median basis at almost $330,000 in the US. Cavco is a name that sells a very affordable payment, which is what the manufactured-housing buyer is typically looking for.

We also think the balance sheet of this company, which is a net cash balance sheet-- significantly net cash balance sheet, gives them the staying power to weather some of the mortgage-rate fluctuations that the manufactured-housing market saw in '23, just like the site-built housing market saw.

JOSH LIPTON: I'm interested, Jay, when you look at these home builders just as companies. Have they become more efficient, Jay, in the last few years? Do their business models look different?

JAY MCCANLESS: Yeah, I think so, and especially if you think about the enhancements that they've made to their websites. 85% of home searches start online now, and the builders-- even before COVID but especially as COVID took off, the builders made a lot of enhancements to their website. You can plan out a lot more things. You can get a visualization of what your home might look like on a given lot inside of a subdivision. So I think for the Gen Zs and the millennials who are solidly in household-formation years, having those tools for digitally native buyers, I think it's been a great resource.

I think the other part of it is the industry in general is finding ways to take lumber out of the houses and maybe take some of the build time out of the houses through engineered wood and other products like that-- so making the house stronger and a little faster to build. So yeah, these are much more efficient companies from that perspective.

But I'll also say that the balance sheets of the majority of the names we cover are in much better shape than they were five years and especially 10 years ago. So building the houses a little smarter as well as running it more efficient and less debt on the balance sheet.

JOSH LIPTON: Jay, thanks so much for joining us today. Really appreciate you--

JAY MCCANLESS: Thank you.

JOSH LIPTON: --helping us kind of think through this sector. Have a great weekend.

JAY MCCANLESS: You too. Thanks.