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4 Stocks to Buy From the Thriving Homebuilding Industry
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The lack of existing homes for sale in the market, along with a desire to own a home, has been driving demand for the U.S. housing space, defying the challenges associated with the high interest rate environment and rising raw material and labor costs. 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 NVR, Inc. (NVR - Free Report) , Toll Brothers Inc. (TOL - Free Report) , Taylor Morrison Home Corporation (TMHC - Free Report) 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.
3 Trends Shaping the Homebuilding Industry's Future
Lack of Supply & Improved Macro Outlook: There is a sizable shortage of new homes after more than a decade of under-building compared with population growth. Improved inflation scenario and continued demand for homes despite high borrowing costs amid low supply have been generating profit for homebuilders. Meanwhile, the changing geography of housing demand has been supporting builder confidence.
Recent macroeconomic indicators suggest a positive outlook for home construction in the upcoming months. Earlier, Fed officials hinted at the possibility of up to three rate cuts this year. Yet, they now emphasized a slower pace compared to the previous decision, depending on the inflation level. Notably, after rising above 8% in October 2023, the average 30-year mortgage rate as of Feb 1, 2024, was 6.63%, down from 6.69% in the prior week. Although still elevated compared to many homeowners' fixed rates, this figure offers a notable relief from the recent two-decade highs.
Despite affordability remaining a key factor in homeownership, the housing market is poised for strength, buoyed by a stable economy, robust demographics, and reduced mortgage rates. Rates have remained steady for approximately two months, and with ongoing moderation in inflation, further declines are anticipated. The economy's resilience, driven by steady job and income expansion, coupled with a surge in household formation surpassing pre-pandemic levels, underpins optimistic projections for the market's fundamental support 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.
Affordability Issue & Tight Labor Market: The challenge of home affordability persists due to high mortgage rates. Despite indications from the Federal Reserve suggesting potential rate reductions instead of increases in the near term, homebuyers may continue to face financial constraints throughout the year. Additionally, as home construction expands in 2024, the market is expected to grapple with increasing supply-side hurdles, potentially resulting in elevated prices and/or shortages of lumber, available lots, and labor.
Meanwhile, 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 #19, which places it in the top 8% 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 December 2023, the industry’s earnings estimates for 2024 have increased to $11.28 per share from $11.04.
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 57.8% compared with the broader sector’s rise of 33.5%. The Zacks S&P 500 Composite has gained 20.8% over this period.
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 10.2 compared with the S&P 500’s 20.5 and the sector’s 16.6.
Over the last five years, the industry has traded as high as 11.6X and as low as 4.2X, with a median of 9.1X, as the chart below shows.
Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500
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 high 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 #1 stock — has gained 147.3% in the past year. The Zacks Consensus Estimate for its 2024 earnings has been upwardly revised by 7.3% over the past 60 days. The estimated figure indicates 12.2% year-over-year growth. 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
NVR: This Reston, VA-based homebuilder is engaged in the construction and sale of single-family detached homes, townhomes and condominium buildings, all of which are primarily constructed on a pre-sold basis. In order to serve homebuilding customers, NVR operates a mortgage banking and title services business. A disciplined business model and focus on maximizing liquidity and minimizing risks have been aiding NVR. The lot acquisition strategy helps the company avoid financial requirements and risks associated with direct land ownership and land development. This strategy allows it to gain efficiencies and a competitive edge over its peers.
NVR — a Zacks Rank #1 stock — has gained 46.2% in the past year. NVR has seen an upward estimate revision for 2024 earnings over the past 60 days by 15.5%. The estimated figure indicates 1.8% year-over-year growth. The company’s earnings surpassed the Zacks Consensus Estimate in all the trailing four quarters, the average being 8.1%.
Price and Consensus: NVR
Toll Brothers: Based in Horsham, PA, Toll Brothers is a leading builder of luxury homes. The company has been benefiting from its strategy of broadening its product lines, price points and geographies. Also, it has been gaining from the lack of competition in the luxury new home market, its build-to-order approach and solid backlog level. This, combined with its focus on operational efficiency and its policy of boosting its supply of spec homes has been helping TOL to drive growth. Meanwhile, the company has been strategically adding more affordable luxury communities because of the current demographic trends and expanding its footprint and customer base. These communities are expected to be more capital efficient.
Toll Brothers — a Zacks Rank #2 stock — stock gained 68.6% in the past year. Earnings estimates for fiscal 2024 have increased to $12.23 per share from $12.19 over the past 60 days. The company’s earnings surpassed the Zacks Consensus Estimate in all the trailing four quarters, the average being 29.4%. 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: TOL
Taylor Morrison Home: This Scottsdale, AZ-based homebuilder and land developer is engaged in building single-family detached and attached homes for first-time buyers, move-up families and luxury and active adult customers. The company has been benefiting from critical advantages by achieving greater scale, simplifying its operations and embracing innovation to drive both growth opportunities and enhance bottom-line growth. Focus on the operational efficiencies and solid liquidity level are tailwinds.
TMHC — a Zacks Rank #2 stock — has gained 46.7% in the past year. TMHC has seen an upward estimate revision for 2024 earnings over the past 30 days by 1.1%. The company’s earnings surpassed the Zacks Consensus Estimate in all the trailing four quarters, the average being 17.5%. Again, it carries an impressive VGM Score of B.
Price and Consensus: TMHC
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4 Stocks to Buy From the Thriving Homebuilding Industry
The lack of existing homes for sale in the market, along with a desire to own a home, has been driving demand for the U.S. housing space, defying the challenges associated with the high interest rate environment and rising raw material and labor costs. 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 NVR, Inc. (NVR - Free Report) , Toll Brothers Inc. (TOL - Free Report) , Taylor Morrison Home Corporation (TMHC - Free Report) 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.
3 Trends Shaping the Homebuilding Industry's Future
Lack of Supply & Improved Macro Outlook: There is a sizable shortage of new homes after more than a decade of under-building compared with population growth. Improved inflation scenario and continued demand for homes despite high borrowing costs amid low supply have been generating profit for homebuilders. Meanwhile, the changing geography of housing demand has been supporting builder confidence.
Recent macroeconomic indicators suggest a positive outlook for home construction in the upcoming months. Earlier, Fed officials hinted at the possibility of up to three rate cuts this year. Yet, they now emphasized a slower pace compared to the previous decision, depending on the inflation level. Notably, after rising above 8% in October 2023, the average 30-year mortgage rate as of Feb 1, 2024, was 6.63%, down from 6.69% in the prior week. Although still elevated compared to many homeowners' fixed rates, this figure offers a notable relief from the recent two-decade highs.
Despite affordability remaining a key factor in homeownership, the housing market is poised for strength, buoyed by a stable economy, robust demographics, and reduced mortgage rates. Rates have remained steady for approximately two months, and with ongoing moderation in inflation, further declines are anticipated. The economy's resilience, driven by steady job and income expansion, coupled with a surge in household formation surpassing pre-pandemic levels, underpins optimistic projections for the market's fundamental support 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.
Affordability Issue & Tight Labor Market: The challenge of home affordability persists due to high mortgage rates. Despite indications from the Federal Reserve suggesting potential rate reductions instead of increases in the near term, homebuyers may continue to face financial constraints throughout the year. Additionally, as home construction expands in 2024, the market is expected to grapple with increasing supply-side hurdles, potentially resulting in elevated prices and/or shortages of lumber, available lots, and labor.
Meanwhile, 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 #19, which places it in the top 8% 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 December 2023, the industry’s earnings estimates for 2024 have increased to $11.28 per share from $11.04.
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 57.8% compared with the broader sector’s rise of 33.5%. The Zacks S&P 500 Composite has gained 20.8% over this period.
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 10.2 compared with the S&P 500’s 20.5 and the sector’s 16.6.
Over the last five years, the industry has traded as high as 11.6X and as low as 4.2X, with a median of 9.1X, as the chart below shows.
Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500
4 Homebuilding Stocks to Bet on
We have selected four stocks from the Zacks homebuilding space that currently carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
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 high 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 #1 stock — has gained 147.3% in the past year. The Zacks Consensus Estimate for its 2024 earnings has been upwardly revised by 7.3% over the past 60 days. The estimated figure indicates 12.2% year-over-year growth. 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
NVR: This Reston, VA-based homebuilder is engaged in the construction and sale of single-family detached homes, townhomes and condominium buildings, all of which are primarily constructed on a pre-sold basis. In order to serve homebuilding customers, NVR operates a mortgage banking and title services business. A disciplined business model and focus on maximizing liquidity and minimizing risks have been aiding NVR. The lot acquisition strategy helps the company avoid financial requirements and risks associated with direct land ownership and land development. This strategy allows it to gain efficiencies and a competitive edge over its peers.
NVR — a Zacks Rank #1 stock — has gained 46.2% in the past year. NVR has seen an upward estimate revision for 2024 earnings over the past 60 days by 15.5%. The estimated figure indicates 1.8% year-over-year growth. The company’s earnings surpassed the Zacks Consensus Estimate in all the trailing four quarters, the average being 8.1%.
Price and Consensus: NVR
Toll Brothers: Based in Horsham, PA, Toll Brothers is a leading builder of luxury homes. The company has been benefiting from its strategy of broadening its product lines, price points and geographies. Also, it has been gaining from the lack of competition in the luxury new home market, its build-to-order approach and solid backlog level. This, combined with its focus on operational efficiency and its policy of boosting its supply of spec homes has been helping TOL to drive growth. Meanwhile, the company has been strategically adding more affordable luxury communities because of the current demographic trends and expanding its footprint and customer base. These communities are expected to be more capital efficient.
Toll Brothers — a Zacks Rank #2 stock — stock gained 68.6% in the past year. Earnings estimates for fiscal 2024 have increased to $12.23 per share from $12.19 over the past 60 days. The company’s earnings surpassed the Zacks Consensus Estimate in all the trailing four quarters, the average being 29.4%. 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: TOL
Taylor Morrison Home: This Scottsdale, AZ-based homebuilder and land developer is engaged in building single-family detached and attached homes for first-time buyers, move-up families and luxury and active adult customers. The company has been benefiting from critical advantages by achieving greater scale, simplifying its operations and embracing innovation to drive both growth opportunities and enhance bottom-line growth. Focus on the operational efficiencies and solid liquidity level are tailwinds.
TMHC — a Zacks Rank #2 stock — has gained 46.7% in the past year. TMHC has seen an upward estimate revision for 2024 earnings over the past 30 days by 1.1%. The company’s earnings surpassed the Zacks Consensus Estimate in all the trailing four quarters, the average being 17.5%. Again, it carries an impressive VGM Score of B.
Price and Consensus: TMHC