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4 Stocks to Watch Amid Challenges for Homebuilding Industry

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The U.S. homebuilding industry has lately seen a slowdown owing to higher mortgage rates and rising costs of raw materials and labor. However, the industry is on solid ground as demand for new homes continues to rise.

Needless to say, the homebuilding industry is fighting hard to overcome the challenges and is hopeful that rising demand for new homes single-family homes will continue to help sales in the coming days. Given this scenario stocks likeLennar Corp. (LEN - Free Report) , D.R. Horton (DHI - Free Report) , KB Home (KBH - Free Report) and Toll Brothers (TOL - Free Report) are likely to benefit in the near term.

Housing Starts, Building Permits Increase

In spite of the existing challenges, homebuilders are hopeful that the scenario will change in the coming days. The Commerce Department said on Apr 19 that housing starts rose 0.3% in March to a seasonally adjusted annual rate of 1.793 units, beating analysts’ expectations of 1.745 million units.

This follows a revision in February’s numbers from 1.769 million units to 1.788 million units.

Also, permits for future buildings increased 0.4% in March to a rate of 1.873 million units.

March’s jump in housing starts is also the highest since 2016. Moreover, according to the report, multifamily starts soared 7.5% to 574,000, the highest level since January 2020.

The rise in March was unexpected, given the rising interest rates. However, it proves that homebuilders are hopeful about sales rising in the near term as demand for new homes has been on the rise for quite some time.

Industry Facing Challenges

Demand for homes was already there, and the pandemic created further need for new homes as people moved to sparsely populated areas on fears of contracting the COVID-19 virus.

Higher demand for new homes coupled with record-low mortgage rates helped the homebuilding sector during the peak of the pandemic and even last year, with sales surging to multi-year highs. However, the homebuilding industry started facing challenges since the latter half of 2021.

Rising timber and raw material costs coupled with labor shortage started escalating prices of homes, which posed as the first major set of challenges for homebuilders. If that was not enough, rising interest rates also started acting as a dampener for home sales.

According to data from mortgage financing firm Freddie Mac, the 30-year fixed-rate mortgage averaged 5% during the week ending Apr 14. This is the highest level since February 2011, up from 4.72% the week earlier.

The Fed hiked interest rates by 25 basis points in its last policy meeting in March, the first time since 2018. This has been hurting buyers. Even then, demand for homes has been on the rise and people are still willing to shell out more on new homes. This is one of the reasons why homebuilders are still hopeful about sales rising in the near term.

Stocks to Watch

The homebuilding market is still going strong, despite rising prices, and demand for homes is predicted to continue through 2022. As a result, it is an opportune time to buy homebuilding stocks.

Lennar Corporation is engaged in homebuilding and financial services in the United States. LEN’s reportable segments consist of Homebuilding, Lennar Financial Services, Rialto and Lennar Multifamily. Despite the varied product portfolio, homebuilding remains Lennar Corporation’s core business.

Lennar Corporation’s expected earnings growth rate for the current year is 15.1%. The Zacks Consensus Estimate for current-year earnings has improved 3.9% over the past 60 days. LEN carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

D.R. Horton is one of the leading national homebuilders, primarily engaged in the construction and sale of single-family houses both in the entry-level and move-up markets. DHI’s operations are spread over 91 markets across 29 states in the East, Midwest, Southeast, South Central, Southwest and West regions of the United States. D.R. Horton’s houses are sold under the brand names D.R. Horton - America’s Builder, Emerald Homes, Express Homes and Freedom Homes.

D.R. Horton’s expected earnings growth rate for the current year is 39.5%. The Zacks Consensus Estimate for current-year earnings has improved 0.8% over the past 60 days.  DHI has a Zacks Rank #3 (Hold).

KB Home is a well-known homebuilder in the United States and one of the largest in the state. KB Homes’ revenues are generated from Homebuilding (accounting for 99.7% of fiscal 2021 total revenues) and Financial Services (0.3%) operations. KBH’s homebuilding operations include building and designing homes that cater to first-time, move-up and active adult homebuyers on acquired or developed lands. KB Home also builds attached and detached single-family homes, town homes and condominiums.

KB Home’s expected earnings growth rate for the current year is 68.3%. The Zacks Consensus Estimate for current-year earnings has improved 0.2% over the past 60 days. KBH has a Zacks Rank #3.

Toll Brothers Inc. builds single-family detached and attached home communities; master-planned luxury residential resort-style golf communities; and urban low, mid, and high-rise communities, principally on the land it develops and improves. TOL operates in Arizona, California, Florida, Delaware, Maryland, Pennsylvania, and South Carolina. Toll Brothers offers homes under two segments, namely Traditional Home Building Product and City Living.

Toll Brothers’ expected earnings growth rate for the current year is 51.1%. The Zacks Consensus Estimate for current-year earnings improved 0.8% over the past 60 days. TOL has a Zacks Rank #3.

In-Depth Zacks Research for the Tickers Above

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Toll Brothers Inc. (TOL) - free report >>

KB Home (KBH) - free report >>

Lennar Corporation (LEN) - free report >>

D.R. Horton, Inc. (DHI) - free report >>