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If I had told you a year ago that we were about to experience a global pandemic that would cause restrictions into nearly every aspect of everyday life, but also that the market for residential real estate would not only hold up just fine, but soar to news highs, you would have thought I was crazy, right?
Yet that’s exactly what happened.
A number of unexpected factors have lined up over the past year to boost the value of existing homes and increase demand for new constructions and KB Home (KBH - Free Report) has been in a position to capitalize.
First, interest rates are at or near all-time lows and 30-year fixed rate mortgages have been available at interest rates below 3% annually – making homes more affordable to the average purchaser even as prices rise.
Second, members of the “millennial” generation are now 25-40 years old and many are seriously considering homeownership for the first time. Having grown up during the financial crisis of 2008-09, millennials were understandably wary of being pinned down – financially and geographically – by owning their primary residence and spent the next decade with a preference for rentals.
Predictably, stable jobs and the establishment of new families have changed those preferences and millennials have become a driving force in the residential real estate market.
You might think that stubbornly high unemployment would interfere with the housing market rally, but the reality is that most of the positions that haven’t yet been regained are relatively low-paid service jobs. Those at the middle and upper income ranges haven’t seen an appreciable drop in incomes – and are still buying houses.
In fact, the “work-from-home” movement has actually helped fuel the rise in housing prices. Having spent more time at home in the past year than at any other time in their lives, homeowners have been improving their spaces in record numbers. That has caused a shortage of skilled labor and materials, driving up the costs of construction as it also adds to the value of existing homes.
Many employers expect that some or all of their employees will continue to work remotely even after Covid restrictions are lifted, so the demand for well-appointed living/working spaces is likely to stay strong even when the pandemic is over.
The final way in which the pandemic has boosted the real estate market is the way it has shifted consumer preferences for larger homes that are farther from concentrated city areas. That trend plays directly to the strengths of builders of new residences like KB Home.
The classic strategy for residential homebuilders is to purchase or option land adjacent to urban areas, then construct new homes to sell as demand increases. With urban populations across the country growing in the areas in which KB Home operates, the company has been running historic order backlogs as they fill one sold-out development after another.
Split into four geographical regions, KB Home serves the fastest growing states in the US – both in terms of population and property values. Washington, California, Arizona, Nevada, Colorado, Texas, Florida and North Carolina are all part of the company’s core strategy. As of the end of the most recent quarter, KBH had an order backlog of more than 7,800 homes representing almost $3 billion in recognizable revenues.
Because of the limitations of offering physical products that take months or years to build, revenues and profits at the homebuilders can’t skyrocket the same way they might for software or other technology companies, but like a locomotive, once they get moving they pick up speed and keep moving in the same direction for years at a time.
After big beats of the Zacks Consensus Earnings Estimate in the previous two quarters, forecasts for current year earnings have risen by 20% in the past 60 days – contributing to a Zacks Rank #1 (Strong Buy). While the shares have made a significant recovery from the lows in March 2020, at current levels, KBH trades at a 12-month forward P/E Ratio of less than 9X and pays a dividend yield of 1.35%.
Most Americans find that their home is their single largest investment, but with the stars lined up for continued strength in the coming years, exposure to home building stocks is an important part of the portfolio as well.
Legal Marijuana: An Investor’s DreamImagine getting in early on a young industry primed to skyrocket from $17.7 billion in 2019 to an expected $73.6 billion by 2027. Although marijuana stocks did better as the pandemic took hold than the market as a whole, they’ve been pushed down. This is exactly the right time to get in on selected strong companies at a fraction of their value before COVID struck. Zacks’ Special Report, Marijuana Moneymakers, reveals 10 exciting tickers for urgent consideration. Download Marijuana Moneymakers FREE >>
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Bull of the Day: KB Home (KBH)
If I had told you a year ago that we were about to experience a global pandemic that would cause restrictions into nearly every aspect of everyday life, but also that the market for residential real estate would not only hold up just fine, but soar to news highs, you would have thought I was crazy, right?
Yet that’s exactly what happened.
A number of unexpected factors have lined up over the past year to boost the value of existing homes and increase demand for new constructions and KB Home (KBH - Free Report) has been in a position to capitalize.
First, interest rates are at or near all-time lows and 30-year fixed rate mortgages have been available at interest rates below 3% annually – making homes more affordable to the average purchaser even as prices rise.
Second, members of the “millennial” generation are now 25-40 years old and many are seriously considering homeownership for the first time. Having grown up during the financial crisis of 2008-09, millennials were understandably wary of being pinned down – financially and geographically – by owning their primary residence and spent the next decade with a preference for rentals.
Predictably, stable jobs and the establishment of new families have changed those preferences and millennials have become a driving force in the residential real estate market.
You might think that stubbornly high unemployment would interfere with the housing market rally, but the reality is that most of the positions that haven’t yet been regained are relatively low-paid service jobs. Those at the middle and upper income ranges haven’t seen an appreciable drop in incomes – and are still buying houses.
In fact, the “work-from-home” movement has actually helped fuel the rise in housing prices. Having spent more time at home in the past year than at any other time in their lives, homeowners have been improving their spaces in record numbers. That has caused a shortage of skilled labor and materials, driving up the costs of construction as it also adds to the value of existing homes.
Many employers expect that some or all of their employees will continue to work remotely even after Covid restrictions are lifted, so the demand for well-appointed living/working spaces is likely to stay strong even when the pandemic is over.
The final way in which the pandemic has boosted the real estate market is the way it has shifted consumer preferences for larger homes that are farther from concentrated city areas. That trend plays directly to the strengths of builders of new residences like KB Home.
The classic strategy for residential homebuilders is to purchase or option land adjacent to urban areas, then construct new homes to sell as demand increases. With urban populations across the country growing in the areas in which KB Home operates, the company has been running historic order backlogs as they fill one sold-out development after another.
Split into four geographical regions, KB Home serves the fastest growing states in the US – both in terms of population and property values. Washington, California, Arizona, Nevada, Colorado, Texas, Florida and North Carolina are all part of the company’s core strategy. As of the end of the most recent quarter, KBH had an order backlog of more than 7,800 homes representing almost $3 billion in recognizable revenues.
Because of the limitations of offering physical products that take months or years to build, revenues and profits at the homebuilders can’t skyrocket the same way they might for software or other technology companies, but like a locomotive, once they get moving they pick up speed and keep moving in the same direction for years at a time.
After big beats of the Zacks Consensus Earnings Estimate in the previous two quarters, forecasts for current year earnings have risen by 20% in the past 60 days – contributing to a Zacks Rank #1 (Strong Buy). While the shares have made a significant recovery from the lows in March 2020, at current levels, KBH trades at a 12-month forward P/E Ratio of less than 9X and pays a dividend yield of 1.35%.
Most Americans find that their home is their single largest investment, but with the stars lined up for continued strength in the coming years, exposure to home building stocks is an important part of the portfolio as well.
Legal Marijuana: An Investor’s DreamImagine getting in early on a young industry primed to skyrocket from $17.7 billion in 2019 to an expected $73.6 billion by 2027. Although marijuana stocks did better as the pandemic took hold than the market as a whole, they’ve been pushed down. This is exactly the right time to get in on selected strong companies at a fraction of their value before COVID struck. Zacks’ Special Report, Marijuana Moneymakers, reveals 10 exciting tickers for urgent consideration. Download Marijuana Moneymakers FREE >>