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5 Stocks to Watch From the Thriving Homebuilding Industry
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The U.S. housing space continues to grapple with accelerating mortgage rates and rising raw material and labor costs. That said, the lack of existing homes for sale in the market along with a desire to own a home has been driving demand. Also, the companies’ focus on cost control, increased operating leverage and important buyouts have been boosting the confidence of the Zacks Building Products - Home Builders industry players. Companies like D.R. Horton, Inc. (DHI - Free Report) , Lennar Corporation (LEN - Free Report) , KB Home (KBH - Free Report) , M.D.C. Holdings, Inc. and Dream Finders Homes, Inc. (DFH - Free Report) have been gaining from their fundamental strength and the above-mentioned tailwinds.
Industry Description
The Zacks Building Products - Home Builders industry comprises manufacturers of residential and commercial buildings. Some industry players are involved in providing financial services that include selling mortgages and collecting fees for title insurance agencies as well as closing services. The industry players are involved in building single-family detached and attached home communities; townhouses, condominiums, duplexes and triplexes; master-planned luxury residential resort-style golf communities; and urban low, mid, and high-rise communities. The companies are also involved in the purchase, development and sale of residential land. Additionally, the companies build and own multi-family rental properties, residential real estate, and oil and gas assets.
4 Trends Shaping the Homebuilding Industry's Future
Lack of Supply: There is a sizable shortage of new homes after more than a decade of under-building compared with population growth. Although demand has slowed recently, supply remains very low. Continued demand for homes despite rising mortgage interest rates amid low supply has been generating profit for homebuilders. Meanwhile, the changing geography of housing demand has been supporting builder confidence.
Despite a continued decline in builder sentiment in November, recent macroeconomic indicators suggest a positive outlook for home construction in the upcoming months. Specifically, the 10-year Treasury rate has reverted to the 4.5% range, marking the first occurrence since late September. This shift is expected to bring mortgage rates to, or even below, 7.5%. With a limited supply of existing homes, the anticipated slight decrease in mortgage rates is likely to stimulate housing demand, laying the groundwork for builders to perceive improved market conditions in the months ahead. The National Association of Home Builders (NAHB) is predicting a roughly 5% uptick in single-family starts in 2024, as financial conditions improve alongside favorable inflation data in the coming months.
Cost-Control Efforts, Focus on Entry-Level Buyers & Acquisitions: Given the accelerated raw material prices, companies have been relying on effective cost control and focusing on making the homebuilding platform more efficient, which, in turn, is resulting in higher operating leverage. Homebuilders have been controlling construction costs by designing homes efficiently and obtaining construction materials and labor at competitive prices. Some homebuilders also follow a dynamic pricing model, which enables them to set the price according to the latest market conditions.
Again, the majority of companies are focused on the growing demand for entry-level homes and addressing the need for lower-priced homes, given affordability concerns in the U.S. housing market. Meanwhile, industry players have been acquiring other homebuilding companies in desirable markets, resulting in improved volumes, market share, revenues and profitability.
Higher Rates: The home affordability issue remains a headwind owing to accelerating mortgage rates. While remaining committed to combating inflation, the Fed raised interest rates last year at the fastest pace since the 1980s, pushing borrowing costs above 5% from near zero. In September 2023, the Federal Reserve kept the interest rate unchanged after having raised its policy rate by 525 basis points (bps) since March 2022 to the current 5.25%-5.50% range (the highest level in the past 22 years) while leaving its options open on future rate hikes. This is less encouraging for this rate-sensitive market, which accounts for almost 3% of the economy.
Tight Labor & Credit Markets: The shortage of skilled construction labor continues to be a pressing concern. With the rising demand for construction, the industry requires more skilled professionals, which is vital to America’s economy. Meanwhile, there still exists supply shortages of building materials as well as tightening credit conditions for residential real estate development and construction due to the recent banking crisis and higher interest rates.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Building Products - Home Builders industry is a 17-stock group within the broader Zacks Construction sector. The industry currently carries a Zacks Industry Rank #87, which places it in the top 35% 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 bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of a higher 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 August 2023, the industry’s earnings estimates for 2023 and 2024 have increased 2.7% and 0.5%, respectively.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
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 59.4% compared with the S&P 500’s rise of 13.4%. The broader sector has gained 27.9% over the time frame.
One-Year Price Performance
Industry's Current Valuation
On the basis of the forward 12-month price-to-earnings ratio, which is commonly used for valuing homebuilding stocks, the industry is currently trading at 8.9 compared with the S&P 500’s 18.7 and the sector’s 14.7.
Over the last five years, the industry has traded as high as 11.6X and as low as 4.2X, with a median of 8.9X, as the chart below shows.
Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500
Lennar: Based in Miami, FL, Lennar is engaged in homebuilding and financial services in the United States. The company is reaping the rewards of its digital marketing efforts and a flexible pricing approach. Additionally, its strategy of minimizing land holdings and implementing efficient cost-saving methods has been advantageous. The company remains dedicated to enhancing its approach to acquiring and managing land, prioritizing the optimization of its land holdings and strategies.
LEN — a Zacks Rank #2 stock — has gained 40.1% this year. Earnings estimates for fiscal 2023 have increased to $13.59 per share from $13.01 over the past 60 days. The company’s earnings surpassed the Zacks Consensus Estimate in all the trailing four quarters, the average being 19.3%.
Price and Consensus: LEN
Dream Finders Homes: This Jacksonville, FL-based company operates as a holding company for Dream Finders Holdings LLC. It provides single-family entry-level and first-time and second-time move-up homes in Charlotte, Raleigh, Jacksonville, Orlando, Denver, the Washington D.C. metropolitan area, Austin, Dallas and Houston. Its land-light operating model and strategic position in high-growth markets, providing affordable homes to entry-level, first and second-time move-up homebuyers, are tailwinds. Also, the build-for-rent platform provides a consistent home deliveries pipeline, which is less susceptible to temporary changes in demand from individual homebuyers. Despite challenging interest rate conditions, the company has consistently achieved strong outcomes, showcasing its proficiency in driving sales and effectively executing its growth strategy. The emphasis remains on efficiently managing construction timelines and enhancing inventory turnover.
DFH — a Zacks Rank #2 stock — has gained 184% this year. The Zacks Consensus Estimate for its 2023 earnings has been upwardly revised by 3.9% over the past 30 days. The company’s earnings surpassed the Zacks Consensus Estimate in three of the trailing four quarters and missed in one, the average being 131.6%.
Price and Consensus: DFH
D.R. Horton: Based in Texas, this homebuilder offers a diverse line of homes across various price points through multi-brand platforms like D.R. Horton, Emerald Homes, Express Homes and Freedom Homes. Further, the company enjoys one of the broadest geographic diversities in the industry and is not dependent on any particular market. With 82,917 homes closed during the 12-month period ended Sep 30, 2023, D.R. Horton has positioned itself as one of the largest homebuilders in the United States. Impressive performance, industry-leading market share, solid acquisition strategy, a well-stocked supply of land, lots and homes, along with affordable product offerings across multiple brands, are expected to drive growth.
D.R. Horton — a Zacks Rank #3 stock — has jumped 42.2% year to date. DHI has seen an upward estimate revision of 0.9% for fiscal 2024 earnings, over the past 30 days. Its earnings topped consensus estimates in all the trailing four quarters, with the average surprise being 28.9%. Again, it carries an impressive VGM Score of A. This helps to identify stocks with the most attractive value, growth and momentum.
Price and Consensus: DHI
KB Home: Based in Los Angeles, CA, KB Home is a well-known homebuilder in the United States and one of the largest in the state. Homebuilding operations include building and designing homes that cater to first-time, move-up and active adult homebuyers on acquired or developed lands. The company's growth stems from the Returns-Focused Growth Plan, integrating core business strategy execution, enhanced asset efficiency, and the monetization of substantial deferred tax assets. Furthermore, its Built-to-Order system empowers buyers with extensive choices in crucial aspects of their prospective homes. Leveraging robust land acquisition strategies also contributes significantly to bolstering gross margins and returns.
KB Home — a Zacks Rank #3 stock — has jumped 66.5% year to date. KBH has seen an upward estimate revision of 3.9% for fiscal 2023 earnings, over the past 30 days. Its earnings topped consensus estimates in three of the trailing four quarters and missed in one, with the average surprise being 26.7%. Again, it carries an impressive VGM Score of A.
Price and Consensus: KBH
M.D.C. Holdings: Headquartered in Denver, CO, this company’s homebuilding operations include purchasing finished lots or developing lots for the construction and sale of primarily single-family detached homes to first-time and first-time move-up homebuyers under the Richmond American Homes name. In a bid to stay competitive in the current market condition, MDC is offering great opportunities for build-to-order buyers, such as long-term interest rate lock programs and other special incentives. The company’s land acquisition strategies and high liquidity add to its growth.
MDC — a Zacks Rank #3 stock — has jumped 39.2% this year. The Zacks Consensus Estimate for its 2023 earnings has been upwardly revised by 3.4%, over the past 30 days. The company’s earnings surpassed the Zacks Consensus Estimate in three of the trailing four quarters and missed on one occasion, the average surprise being 53.6%. Again, it carries an impressive VGM Score of A.
Price and Consensus: MDC
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5 Stocks to Watch From the Thriving Homebuilding Industry
The U.S. housing space continues to grapple with accelerating mortgage rates and rising raw material and labor costs. That said, the lack of existing homes for sale in the market along with a desire to own a home has been driving demand. Also, the companies’ focus on cost control, increased operating leverage and important buyouts have been boosting the confidence of the Zacks Building Products - Home Builders industry players. Companies like D.R. Horton, Inc. (DHI - Free Report) , Lennar Corporation (LEN - Free Report) , KB Home (KBH - Free Report) , M.D.C. Holdings, Inc. and Dream Finders Homes, Inc. (DFH - Free Report) have been gaining from their fundamental strength and the above-mentioned tailwinds.
Industry Description
The Zacks Building Products - Home Builders industry comprises manufacturers of residential and commercial buildings. Some industry players are involved in providing financial services that include selling mortgages and collecting fees for title insurance agencies as well as closing services. The industry players are involved in building single-family detached and attached home communities; townhouses, condominiums, duplexes and triplexes; master-planned luxury residential resort-style golf communities; and urban low, mid, and high-rise communities. The companies are also involved in the purchase, development and sale of residential land. Additionally, the companies build and own multi-family rental properties, residential real estate, and oil and gas assets.
4 Trends Shaping the Homebuilding Industry's Future
Lack of Supply: There is a sizable shortage of new homes after more than a decade of under-building compared with population growth. Although demand has slowed recently, supply remains very low. Continued demand for homes despite rising mortgage interest rates amid low supply has been generating profit for homebuilders. Meanwhile, the changing geography of housing demand has been supporting builder confidence.
Despite a continued decline in builder sentiment in November, recent macroeconomic indicators suggest a positive outlook for home construction in the upcoming months. Specifically, the 10-year Treasury rate has reverted to the 4.5% range, marking the first occurrence since late September. This shift is expected to bring mortgage rates to, or even below, 7.5%. With a limited supply of existing homes, the anticipated slight decrease in mortgage rates is likely to stimulate housing demand, laying the groundwork for builders to perceive improved market conditions in the months ahead. The National Association of Home Builders (NAHB) is predicting a roughly 5% uptick in single-family starts in 2024, as financial conditions improve alongside favorable inflation data in the coming months.
Cost-Control Efforts, Focus on Entry-Level Buyers & Acquisitions: Given the accelerated raw material prices, companies have been relying on effective cost control and focusing on making the homebuilding platform more efficient, which, in turn, is resulting in higher operating leverage. Homebuilders have been controlling construction costs by designing homes efficiently and obtaining construction materials and labor at competitive prices. Some homebuilders also follow a dynamic pricing model, which enables them to set the price according to the latest market conditions.
Again, the majority of companies are focused on the growing demand for entry-level homes and addressing the need for lower-priced homes, given affordability concerns in the U.S. housing market. Meanwhile, industry players have been acquiring other homebuilding companies in desirable markets, resulting in improved volumes, market share, revenues and profitability.
Higher Rates: The home affordability issue remains a headwind owing to accelerating mortgage rates. While remaining committed to combating inflation, the Fed raised interest rates last year at the fastest pace since the 1980s, pushing borrowing costs above 5% from near zero. In September 2023, the Federal Reserve kept the interest rate unchanged after having raised its policy rate by 525 basis points (bps) since March 2022 to the current 5.25%-5.50% range (the highest level in the past 22 years) while leaving its options open on future rate hikes. This is less encouraging for this rate-sensitive market, which accounts for almost 3% of the economy.
Tight Labor & Credit Markets: The shortage of skilled construction labor continues to be a pressing concern. With the rising demand for construction, the industry requires more skilled professionals, which is vital to America’s economy. Meanwhile, there still exists supply shortages of building materials as well as tightening credit conditions for residential real estate development and construction due to the recent banking crisis and higher interest rates.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Building Products - Home Builders industry is a 17-stock group within the broader Zacks Construction sector. The industry currently carries a Zacks Industry Rank #87, which places it in the top 35% 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 bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of a higher 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 August 2023, the industry’s earnings estimates for 2023 and 2024 have increased 2.7% and 0.5%, respectively.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
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 59.4% compared with the S&P 500’s rise of 13.4%. The broader sector has gained 27.9% over the time frame.
One-Year Price Performance
Industry's Current Valuation
On the basis of the forward 12-month price-to-earnings ratio, which is commonly used for valuing homebuilding stocks, the industry is currently trading at 8.9 compared with the S&P 500’s 18.7 and the sector’s 14.7.
Over the last five years, the industry has traded as high as 11.6X and as low as 4.2X, with a median of 8.9X, as the chart below shows.
Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500
5 Homebuilding Stocks to Keep an Eye on
We have selected two stocks from the Zacks homebuilding space that currently carry a Zacks Rank #2 (Buy) and three stocks currently carrying a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Lennar: Based in Miami, FL, Lennar is engaged in homebuilding and financial services in the United States. The company is reaping the rewards of its digital marketing efforts and a flexible pricing approach. Additionally, its strategy of minimizing land holdings and implementing efficient cost-saving methods has been advantageous. The company remains dedicated to enhancing its approach to acquiring and managing land, prioritizing the optimization of its land holdings and strategies.
LEN — a Zacks Rank #2 stock — has gained 40.1% this year. Earnings estimates for fiscal 2023 have increased to $13.59 per share from $13.01 over the past 60 days. The company’s earnings surpassed the Zacks Consensus Estimate in all the trailing four quarters, the average being 19.3%.
Price and Consensus: LEN
Dream Finders Homes: This Jacksonville, FL-based company operates as a holding company for Dream Finders Holdings LLC. It provides single-family entry-level and first-time and second-time move-up homes in Charlotte, Raleigh, Jacksonville, Orlando, Denver, the Washington D.C. metropolitan area, Austin, Dallas and Houston. Its land-light operating model and strategic position in high-growth markets, providing affordable homes to entry-level, first and second-time move-up homebuyers, are tailwinds. Also, the build-for-rent platform provides a consistent home deliveries pipeline, which is less susceptible to temporary changes in demand from individual homebuyers. Despite challenging interest rate conditions, the company has consistently achieved strong outcomes, showcasing its proficiency in driving sales and effectively executing its growth strategy. The emphasis remains on efficiently managing construction timelines and enhancing inventory turnover.
DFH — a Zacks Rank #2 stock — has gained 184% this year. The Zacks Consensus Estimate for its 2023 earnings has been upwardly revised by 3.9% over the past 30 days. The company’s earnings surpassed the Zacks Consensus Estimate in three of the trailing four quarters and missed in one, the average being 131.6%.
Price and Consensus: DFH
D.R. Horton: Based in Texas, this homebuilder offers a diverse line of homes across various price points through multi-brand platforms like D.R. Horton, Emerald Homes, Express Homes and Freedom Homes. Further, the company enjoys one of the broadest geographic diversities in the industry and is not dependent on any particular market. With 82,917 homes closed during the 12-month period ended Sep 30, 2023, D.R. Horton has positioned itself as one of the largest homebuilders in the United States. Impressive performance, industry-leading market share, solid acquisition strategy, a well-stocked supply of land, lots and homes, along with affordable product offerings across multiple brands, are expected to drive growth.
D.R. Horton — a Zacks Rank #3 stock — has jumped 42.2% year to date. DHI has seen an upward estimate revision of 0.9% for fiscal 2024 earnings, over the past 30 days. Its earnings topped consensus estimates in all the trailing four quarters, with the average surprise being 28.9%. Again, it carries an impressive VGM Score of A. This helps to identify stocks with the most attractive value, growth and momentum.
Price and Consensus: DHI
KB Home: Based in Los Angeles, CA, KB Home is a well-known homebuilder in the United States and one of the largest in the state. Homebuilding operations include building and designing homes that cater to first-time, move-up and active adult homebuyers on acquired or developed lands. The company's growth stems from the Returns-Focused Growth Plan, integrating core business strategy execution, enhanced asset efficiency, and the monetization of substantial deferred tax assets. Furthermore, its Built-to-Order system empowers buyers with extensive choices in crucial aspects of their prospective homes. Leveraging robust land acquisition strategies also contributes significantly to bolstering gross margins and returns.
KB Home — a Zacks Rank #3 stock — has jumped 66.5% year to date. KBH has seen an upward estimate revision of 3.9% for fiscal 2023 earnings, over the past 30 days. Its earnings topped consensus estimates in three of the trailing four quarters and missed in one, with the average surprise being 26.7%. Again, it carries an impressive VGM Score of A.
Price and Consensus: KBH
M.D.C. Holdings: Headquartered in Denver, CO, this company’s homebuilding operations include purchasing finished lots or developing lots for the construction and sale of primarily single-family detached homes to first-time and first-time move-up homebuyers under the Richmond American Homes name. In a bid to stay competitive in the current market condition, MDC is offering great opportunities for build-to-order buyers, such as long-term interest rate lock programs and other special incentives. The company’s land acquisition strategies and high liquidity add to its growth.
MDC — a Zacks Rank #3 stock — has jumped 39.2% this year. The Zacks Consensus Estimate for its 2023 earnings has been upwardly revised by 3.4%, over the past 30 days. The company’s earnings surpassed the Zacks Consensus Estimate in three of the trailing four quarters and missed on one occasion, the average surprise being 53.6%. Again, it carries an impressive VGM Score of A.
Price and Consensus: MDC