Meritage Homes Corporation (MTH Quick QuoteMTH - Free Report) has been benefiting from solid housing demand, pricing power, and a strong brand presence and focus on entry-level home buyers. Also, the company’s focus on the strategic shift to a pure-play entry-level and first-move-up builder is expected to drive growth.

Yet, the Zacks Building Products - Home Builders and related industries have been grappling with supply woes and labor constraints. Also, the rising cost of materials and transportation as well as the Fed’s expectation of future interest rate hikes are adding to the woes.

To mitigate these macro headwinds, Meritage Homes and other homebuilders like Lennar Corporation (LEN Quick QuoteLEN - Free Report) , PulteGroup, Inc. (PHM Quick QuotePHM - Free Report) and D.R. Horton, Inc. (DHI Quick QuoteDHI - Free Report) have undertaken various price actions as well as cost-saving moves. These companies are currently observing price-cost neutrality, which will certainly reduce cost pressure on the bottom line.

Let’s delve deeper into the factors supporting the growth of this leading homebuilder.

Factors Driving Growth

Improved Housing Market: Lower mortgage rates have been driving the U.S. residential market over the past few months. Furthermore, demand for new single-family homes has seen a V-shaped recovery throughout the country and Meritage Homes is not an exception. The rising work-from-home trend and fear of future interest rate hikes are prompting many families to choose new and spacious homes, thereby boosting demand.

Although the recent industry parameters that give a clear picture of housing market conditions are somewhat depressed, solid job data and construction spending numbers are encouraging.

Focus on Entry-Level LiVE.NOW Homes: Meritage Homes remains focused on boosting the demand for entry-level homes with its LiVE.NOW product that addresses the need for lower-priced homes, given the rising interest rates and home prices. It is continuously building homes on a spec basis for LiVE.NOW. communities.

The company believes that its strategy of targeting entry-level and first move-up buyers is gaining traction and will continue to boost performance over the long haul. Entry-level buyers comprised 81% of fourth-quarter 2021 closings, up from 72% in the prior year. Furthermore, the same comprised more than 80% of fourth-quarter 2021 orders.

Expanding Land Positions: Meritage Homes continues to find new land positions while remaining disciplined in underwriting standards. As of Dec 31, 2021, the company’s total lot supply was nearly 75,000 lots, reflecting a 35% year-over-year increase from 55,502 in the corresponding period of 2020. This reflects nearly six years supply of lots based on trailing 12-month closings. Also, these new lots will translate to an estimated 45 net new communities, of which 93% are entry-level, with an average community size of nearly 200 lots.

Margin Driving Moves: The performance of Meritage Homes continues to improve, given the company’s strong order growth, EPS improvement and improving gross margin. The company is making homes out of speculations that promise faster delivery at a lower cost. Meritage Homes’ strategic shift to a pure-play entry-level and first-move-up builder is expected to yield higher absorptions, aided by an improving community count growth trajectory. Additionally, the company has reduced ASP for homes in order to address the needs of millennials and baby boomers who want affordable homes and highly desirable communities.

Supply Chain Disruption & Inflation May Put Pressure on Profits

The rising building material and labor costs are growing concerns for the company’s margin. Labor shortages are resulting in higher wages. Also, higher lumber prices are likely to weigh on the bottom line. Land prices are inflating due to limited availability. This could eat into homebuilders’ margins in the forthcoming quarters.

At present, a shortage of buildable lots, skilled labor and available capital for smaller builders is limiting home production, thereby lowering the inventory of homes, both new and existing. Over the last few quarters, supply headwinds have been compelling homebuilders to increase the prices of homes.

The federal government’s actions related to economic stimulus, taxation and borrowing limits could affect consumer confidence, and spending levels may hurt the housing market. It is to be noted that the Federal Reserve expects to raise interest rates three times in 2022 as it exits from the policies enacted at the start of the health crisis. Interest rate hikes, soaring inflation and a smaller bond-buying program are pointing to higher mortgage rates in 2022.

Discussion of the Above-Mentioned Stocks

Lennar: This well-known homebuilder is benefiting from effective cost control and focus on making its homebuilding platform more efficient, leading to higher operating leverage.

Lennar’s earnings for fiscal 2022 are expected to rise 10.9% year over year to $15.82 per share.

PulteGroup: This Atlanta-based homebuilder has been benefiting from a prudent land investment strategy and focus on entry-level buyers and returning more free cash flow to shareholders. PulteGroup’s annual land acquisition strategies have been resulting in improved volumes, revenues and profitability for quite some time now. The company has been reaping benefits from the successful execution of strategic initiatives to boost profitability, with a focus on entry-level homes.

Earnings for 2022 are expected to increase 38.6%.

D.R. Horton: This Texas-based prime homebuilder continues to gain from industry-leading market share, a solid acquisition strategy, a well-stocked supply of land, lots, and homes along with affordable product offerings across multiple brands.

D.R. Horton’s earnings are expected to rise 38.5% year over year in fiscal 2022.