For Immediate Release
Chicago, IL – July 11, 2016 – Today, Zacks Equity Research discusses Homebuilding, Part 2, including Lennar Corp. (LEN - Free Report) , Toll Brothers, Inc. (TOL - Free Report) , PulteGroup, Inc. (PHM - Free Report) , KB Home ( (KBH - Free Report) and Beazer Homes USA Inc. (BZH - Free Report) .
Industry: Homebuilding, Part 2
The 2016 spring selling season was better than last year. Springtime weather in general boosts construction activity and traffic trends. Moreover, the sustained period of low mortgage rates this spring was incentive enough to buy a home.
With an improving economy, encouraging job numbers and affordable mortgage rates, homebuilding should gain further steam as the year progresses. For that matter, there are plenty of reasons to be optimistic about the broader housing sector over both the short and long term.
Below, we discuss some of the key reasons driving the sector and what investors can look forward to in the coming months and years.
Rising Demand and Low Inventory Boost Home Sales
Steady economic growth, along with increasing household formation, favorable demographics, low interest rates and the attractiveness of owning versus renting is fueling demand.
On the other hand, a shortage of buildable lots, skilled labor and available capital for smaller builders are limiting home production, thereby lowering the inventory of homes, both new and existing. The convergence of healthy demand and low inventory levels is boosting new home sales and is expected to continue for some time.
Total housing inventory of existing homes was 5.7% lower at the end of May than a year ago, per data released by the National Association of Realtors in June.New home inventory for sale was 244,000 units at the end of May, a 5.3-month supply at the current sales pace, only slightly up from April levels.
Steady Economic Growth
Improving economic growth supported by a better employment picture generally boosts household formations and provides a basis for stronger housing demand.
So far in 2016, the employment numbers have been fairly strong.
With a fall in the unemployment rate, rising wages and decent consumer confidence, the U.S. economy looks quite strong despite rising pressure elsewhere and Brexit-related economic uncertainties. The market, in general, believes that the repercussions of the departure of the U.K. from the European Union will not have any major impact on U.S. homebuilding activity.
Affordable Mortgage Rates, Moderating Home Price Gains
Housing was an affordable option in 2015 as mortgage rates remained near historic lows. High mortgage rates dilute the demand for new homes as mortgage loans become expensive. This lowers buyers’ purchasing power and hurts volumes, revenues and profits of homebuilders.
According to the Freddie Mac mortgage survey, the 30-year fixed mortgage rate went down from 4.17% in 2014 to 3.85% in 2015. In 2016, the trend continues with rates going down further to 3.60% in May. Even if mortgage/interest rates rise with the Fed probably announcing further federal fund rate hikes later this year or next, the rates should remain reasonable, in our view, keeping housing affordable.Modest hikes in interest rates in the context of an improving economic environment can be a net positive for the housing sector
Moreover, improving labor markets, falling unemployment rates, low mortgage rates and a limited home supply are supporting a continued rise in home prices, thereby booting homebuilders’ top line.
From the buyers’ point of view, though home prices are rising across the country with increasing demand, the price gains are moderating.
Low mortgage rates and moderating home price gains give homebuyers much-needed confidence. This in turn stokes demand.
Land as Native Strength
The well-stocked supply of land, plots and homes of large homebuilders like Lennar Corp. (LEN) and Toll Brothers, Inc. ( TOL) provide them with a strong competitive position to meet demand in future quarters, thereby growing sales and home closings.
Toll Brothers has secured some of the most sought-after urban locations in the country, such as New York City, Northern New Jersey, Philadelphia and Washington D.C., where land is scarce and approvals are not easy to come by.
Interestingly, homebuilders like PulteGroup, Inc. ( PHM) and Lennar are moving away from a land-heavy acquisition strategy to acquiring land with a shorter two- to three-year average life to improve its returns. Pulte also focuses on investing in land in closer-in locations where demand is more sustainable.
Smaller homebuilders have also realized the importance of land investments to support future growth. KB Home (KBH) and Beazer Homes USA Inc. ( BZH) are stepping up land investments to strengthen their position in an improving housing market.
Though they admit to rising labor shortages and land/labor costs, homebuilders in general expect the housing market to continue its measured recovery this year in tandem with steady economic growth.
Investors could definitely take advantage of the opportunities in the near term and cash in on any sudden surge in the homebuilding sector.
Want the latest recommendations from Zacks Investment Research? Today, you can download7 Best Stocks for the Next 30 Days. Click to get this free report >>
Zacks.com is a property of Zacks Investment Research, Inc., which was formed in 1978. The later formation of the Zacks Rank, a proprietary stock picking system; continues to outperform the market by nearly a 3 to 1 margin. The best way to unlock the profitable stock recommendations and market insights of Zacks Investment Research is through our free daily email newsletter; Profit from the Pros. In short, it's your steady flow of Profitable ideas GUARANTEED to be worth your time! Click here for your free subscription to Profit from the Pros.
Follow us on Twitter: https://twitter.com/zacksresearch
Join us on Facebook: https://www.facebook.com/home.php#/pages/Zacks-Investment-Research/57553657748?ref=ts
Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Zacks Investment Research
800-767-3771 ext. 9339
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.