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Homebuilding Market Likely to Witness a Rebound in 2024
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The homebuilding industry is gradually recovering over the last two months after suffering one of the worst periods in the previous two years. This space was one of the worst sufferers of the Federal Reserve’s aggressive interest rate hike policy.
Accelerating mortgage rates as well as rising raw material and labor costs, hit the homebuilding industry. Buyers were discouraged from investing in new homes despite strong demand.
Meanwhile, as the inflation rate started declining, despite remaining above the Fed’s 2% target level, the central bank stopped hiking the interest rate in July 2023. Moreover, in its December FOMC meeting, the Fed gave a clear indication that rate cut will start this year.
Positive Catalysts
Hopes of a lower risk-free market interest rate resulted in a decline in mortgage rates since November. A low mortgage rate will be extremely beneficial for the homebuilding industry for both buyers and sellers.
The National Association of Homebuilders/Wells Fargo Index reading showed that homebuilder confidence bounced back to 44 in January from 37 in December and 34 in November. January’s reading was the highest since September 2023.
Privately???owned housing starts in December came in at 1.46 million units, down 4.3% sequentially but up 7.6% year over year. The metric also surpassed the consensus estimate of 1.44 million units. Building permits in December totaled 1.495 million units, up 1.9% over the previous month and 6.1% year over year. The metric also surpassed the consensus estimate of 1.478 million units.
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.
Effective Cost Control Measures
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.
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.
Stocks to Watch
Several good stocks within the homebuilding industry. However, it is better to stay with large-cap (market capital >$10 billion) stocks that have seen positive earnings estimate revisions for 2024 in the last 30 days. Five such stocks are - D.R. Horton Inc. (DHI - Free Report) , Lennar Corp. (LEN - Free Report) , PulteGroup Inc. (PHM - Free Report) , NVR Inc. (NVR - Free Report) and Toll Brothers Inc. (TOL - Free Report) .
The chart below shows the price performance of the five above-mentioned stocks in the past three months.
Image Source: Zacks Investment Research
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Homebuilding Market Likely to Witness a Rebound in 2024
The homebuilding industry is gradually recovering over the last two months after suffering one of the worst periods in the previous two years. This space was one of the worst sufferers of the Federal Reserve’s aggressive interest rate hike policy.
Accelerating mortgage rates as well as rising raw material and labor costs, hit the homebuilding industry. Buyers were discouraged from investing in new homes despite strong demand.
Meanwhile, as the inflation rate started declining, despite remaining above the Fed’s 2% target level, the central bank stopped hiking the interest rate in July 2023. Moreover, in its December FOMC meeting, the Fed gave a clear indication that rate cut will start this year.
Positive Catalysts
Hopes of a lower risk-free market interest rate resulted in a decline in mortgage rates since November. A low mortgage rate will be extremely beneficial for the homebuilding industry for both buyers and sellers.
The National Association of Homebuilders/Wells Fargo Index reading showed that homebuilder confidence bounced back to 44 in January from 37 in December and 34 in November. January’s reading was the highest since September 2023.
Privately???owned housing starts in December came in at 1.46 million units, down 4.3% sequentially but up 7.6% year over year. The metric also surpassed the consensus estimate of 1.44 million units. Building permits in December totaled 1.495 million units, up 1.9% over the previous month and 6.1% year over year. The metric also surpassed the consensus estimate of 1.478 million units.
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.
Effective Cost Control Measures
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.
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.
Stocks to Watch
Several good stocks within the homebuilding industry. However, it is better to stay with large-cap (market capital >$10 billion) stocks that have seen positive earnings estimate revisions for 2024 in the last 30 days. Five such stocks are - D.R. Horton Inc. (DHI - Free Report) , Lennar Corp. (LEN - Free Report) , PulteGroup Inc. (PHM - Free Report) , NVR Inc. (NVR - Free Report) and Toll Brothers Inc. (TOL - Free Report) .
The chart below shows the price performance of the five above-mentioned stocks in the past three months.
Image Source: Zacks Investment Research