Deep Dive: Three reasons investors have fallen in love with home builders’ stocks

by | Oct 12, 2023 | Stock Market

At a time when mortgage loan rates have soared to their highest levels since 2000, it might surprise you that some analysts think this is a good time to buy shares of large home builders. But there are a number of good reasons for long-term investors to consider buying home builders’ stocks now, as outlined by Oppenheimer & Co. analysts Tyler Batory and Jonathan Jenkins in a note to clients on Thursday. Only four home builders are included in the S&P 500
: D.R. Horton Inc.
Lennar Corp.
NVR Inc.
and PulteGroup Inc.

To screen the home-building space, we looked at the S&P 1500 Composite Index
which is made up of the S&P 500, the S&P 400 Midcap Index
and the S&P Small Cap 600 Index
and includes 17 home builders. If you would like to take a broader approach to the residential-construction space using exchange-traded funds, the iShares U.S. Home Construction ETF
holds 46 stocks, while the SPDR S&P Homebuilders ETF
holds 35 stocks. In addition to home builders, both ETFs invest in suppliers to the industry, such as Builders FirstSource Inc.
Floor & Decor Holdings Inc.
Home Depot Inc.
and Lowe’s Cos. Inc.
3 reasons to consider home builders’ stocks now1. High mortgage rates have increased demand for newly constructed homes. The national average rate for a 30-year mortgage loan was about 7.7% last week, increasing from about 7.5% the previous week, according to the Mortgage Bankers Association. “The rate lock-in effect remains alive and well,” the Oppenheimer analysts wrote. If you have owned a home for several years, it might be financed by a loan with a very low rate, making you reluctant to move and face much higher payments on a high-rate loan. The Oppenheimer analysts cited a 9% decline in newly listed homes for sale in September from a year earlier and added that a limit to supply “funnels demand toward new homes, especially of the larger builders, given their sophisticated pricing tools and ability to offer mortgage incentives.” According to Batory and Jenkins, the largest 10 U.S. builders had a 42.6% market share for new construction in the U.S. during 2022, up from 27.4% in 2017 and 22.6% in 2005, with a few changes in the makeup of the top 10 from the previous periods. In 2022, the four home builders included in the S&P 500 — D.R. Horton, Lennar, NVR and PulteGroup — had a 31.6% share, up from 18.5% in 2017 and 12% in 2005. According to the Oppenheimer analysts, the largest builders have been continuing to increase their market share in 2023, and the trend is improving profit margins “as larger companies get more leverage on their fixed costs.”2. Despite slowing industry growth, home builders’ stocks have risen this year and remain at low valuations to expected profits. The S&P Composite 1500 Homebuilding industry group — the 17 stocks in the index weighted by market capitalization — has retu …

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