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5 Stocks to Watch From the Promising Homebuilding Industry
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The lack of existing homes for sale in the market, along with a desire to own a home, has been driving demand for the U.S. housing space, defying the challenges associated with the high interest rate environment and rising raw material and labor costs. Prudent strategic efforts in maintaining a balance between speculative and build-to-order approaches have been helping companies target various buyer preferences and market segments effectively. Also, the companies’ focus on cost control, increased operating leverage, focus on mortgage rate buydown programs and important buyouts bode well for the Zacks Building Products - Home Builders industry players. Companies like D.R. Horton, Inc. (DHI - Free Report) , PulteGroup, Inc. (PHM - Free Report) , Meritage Homes Corporation (MTH - Free Report) , KB Home (KBH - Free Report) and M/I Homes, Inc. (MHO - Free Report) have been gaining from their fundamental strength and the above-mentioned tailwinds.
Industry Description
The Zacks Building Products - Home Builders industry comprises manufacturers of residential and commercial buildings. Some industry players are involved in providing financial services that include selling mortgages and collecting fees for title insurance agencies as well as closing services. The industry players are involved in building single-family detached and attached home communities; townhouses, condominiums, duplexes and triplexes; master-planned luxury residential resort-style golf communities; and urban low, mid, and high-rise communities. The companies are also involved in the purchase, development and sale of residential land. Additionally, the companies build and own multi-family rental properties, residential real estate, and oil and gas assets.
4 Trends Shaping the Homebuilding Industry's Future
Lack of Supply & Mortgage Buydown Programs: There is a sizable shortage of new as well as existing homes after more than a decade of under-building compared with population growth. Low housing inventory, the desire to own a home, and favorable demographic trends have been propelling growth in the new home market. Homebuilders anticipate this momentum to persist in the long run, buoyed by these factors. The economy's resilience, driven by steady job and income expansion, coupled with a surge in household formation surpassing pre-pandemic levels, underpins optimistic projections for the market's fundamental support in the coming months.
Meanwhile, the increased use of mortgage rate buydowns — temporary interest rate reductions offered along with the purchase of a new home to ease borrowers into the full mortgage payment for the beginning of a loan term — has been driving demand. Buydowns appear to be more of a marketing tool to offset the salience of high mortgage rates.
Cost-Control Efforts, Focus on Entry-Level Buyers & Acquisitions: 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.
Again, the majority of companies are focused on the growing demand for entry-level homes and addressing the need for lower-priced homes. Meanwhile, industry players have been acquiring other homebuilding companies in desirable markets, resulting in improved volumes, market share, revenues and profitability.
Rate Reductions Not Imminent: The Fed’s decision to uphold interest rates in the range of 5.25%-5.5% has been consistent since August 2023. Despite earlier suggestions by Fed officials of potential rate cuts, they now stress a more cautious approach contingent upon inflation levels. While concerns persist regarding inflation and its impact on borrowing costs, Fed chairman Jerome Powell clarified that the central bank is not currently considering reducing rates. This news is less favorable for the rate-sensitive housing industry, which contributes nearly 3% to the economy.
Affordability Issue & Tight Labor Market: The challenge of home affordability persists due to high mortgage rates. Despite indications from the Federal Reserve suggesting potential rate reductions instead of increases in the near term, homebuyers may continue to face financial constraints throughout the year. Additionally, as home construction expands in 2024, the market is expected to grapple with increasing supply-side hurdles, potentially resulting in elevated prices and/or shortages of lumber, available lots, and labor. Meanwhile, the shortage of skilled construction labor continues to be a pressing concern. With the rising demand for construction, the industry requires more skilled professionals, which is vital to America’s economy.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Building Products - Home Builders industry is a 16-stock group within the broader Zacks Construction sector. The industry currently carries a Zacks Industry Rank #106, which places it in the top 42% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of a higher earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. Since March 2024, the industry’s earnings estimates for 2024 have increased to $11.98 per share from $11.63.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Outperforms Sector and S&P 500
The Zacks Building Products - Home Builders industry has outperformed the S&P 500 Index and the broader Zacks Construction sector in the past year.
Over this period, the industry has gained 26% compared with the broader sector’s rise of 24.5%. The Zacks S&P 500 Composite has gained 25.1% over this period.
One-Year Price Performance
Industry's Current Valuation
On the basis of the forward 12-month price-to-earnings ratio, which is commonly used for valuing homebuilding stocks, the industry is currently trading at 10.22 compared with the S&P 500’s 22.01 and the sector’s 17.01.
Over the last five years, the industry has traded as high as 11.64X and as low as 4.18X, with a median of 9.08X, as the chart below shows.
Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500
KB Home: Based in Los Angeles, CA, KB Home is a well-known homebuilder in the United States and one of the largest in the state. Homebuilding operations include building and designing homes that cater to first-time, move-up and active adult homebuyers on acquired or developed lands. The company's growth stems from the Returns-Focused Growth Plan, integrating core business strategy execution, enhanced asset efficiency, and the monetization of substantial deferred tax assets. Furthermore, its Built-to-Order system empowers buyers with extensive choices in crucial aspects of their prospective homes. Leveraging robust land acquisition strategies also contributes significantly to bolstering gross margins and returns.
KB Home — a Zacks Rank #2 stock — has surged 40.9% over the past year. KBH has seen an upward estimate revision of 3.7% for fiscal 2024 earnings over the past 30 days. The estimated figure indicates 18.2% year-over-year growth. Its earnings topped the consensus estimate in all the trailing four quarters, with the average surprise being 18.4%. Again, it carries an impressive VGM Score of B. This helps to identify stocks with the most attractive value, growth and momentum. KBH has a three-to-five-year expected EPS growth rate of 11.8%.
Price and Consensus: KBH
D.R. Horton: Based in Texas, this homebuilder offers a diverse range of homes across various price points through multi-brand platforms, including D.R. Horton, Emerald Homes, Express Homes, and Freedom Homes. The company boasts one of the broadest geographic diversities in the industry, ensuring it is not reliant on any single market. With 94,049 homes closed in the 12 months that ended on Mar 31, 2024, D.R. Horton has established itself as one of the largest homebuilders in the United States. The company’s impressive performance, industry-leading market share, strategic acquisitions, ample supply of land, lots, and homes, along with affordable product offerings across multiple brands, are expected to drive continued growth.
D.R. Horton — a Zacks Rank #2 stock — has rallied 18.8% over the past year. Its earnings topped consensus estimates in three of the trailing four quarters and missed on one occasion, with the average surprise being 15.6%. Again, it carries an impressive VGM Score of A. The Zacks Consensus Estimate for fiscal 2024 EPS indicates 3.4% year-over-year growth. DHI has a three-to-five-year expected EPS growth rate of 14.1%.
Price and Consensus: DHI
M/I Homes: This Columbus, OH-based builder of single-family homes has been gaining from a high level of performance across all its housing operations and the Mortgage and Title business. The company has a diverse product offering. It designs, markets, constructs and sells single-family homes and attached townhomes to first-time, millennial, move-up, empty-nester and luxury buyers under the M/I Homes brand name. A stellar backlog level has been helping the company to generate improved profits. Also, a higher return on equity bodes well. MHO remains optimistic about navigating the ongoing challenges, given its balance sheet strength, low debt levels, record backlog sales value, diverse product offerings and well-located communities.
M/I Homes — a Zacks Rank #3 stock — has surged 49.6% over the past year. Its earnings topped the consensus estimate in three of the trailing four quarters, with the average surprise being 19%. Again, it carries an impressive VGM Score of A. The Zacks Consensus Estimate for 2024 EPS indicates 12.2% year-over-year growth.
Price and Consensus: MHO
PulteGroup: Located in Atlanta, GA, this homebuilding company has been capitalizing on a cyclically resilient operating model, effective pricing strategy and mortgage rate buydown program. PulteGroup is effectively managing a balance between spec (speculative) and build-to-order approaches to drive growth by maintaining a strategic mix and responding to market conditions. By balancing spec and build-to-order homes, PulteGroup is able to address diverse buyer needs, remain flexible in response to market conditions, and leverage operational efficiencies to drive growth. PulteGroup's first-quarter 2024 results highlighted its robust ability to thrive in a prolonged high-rate environment. Despite market volatility, the company achieved a 14% year-over-year increase in net orders, raised net pricing in approximately half of its communities, and set a new company record for first-quarter gross margins at 29.6% (compared to guidance of 28% to 28.5%).
PulteGroup — a Zacks Rank #3 stock — has surged 42.3% in the past year. The Zacks Consensus Estimate for its 2024 EPS is expected to register 10% year-year-year growth. Its earnings topped the consensus estimate in all the trailing four quarters, with the average surprise being 12.5%. Again, it carries an impressive VGM Score of B. PHM has a three-to-five-year expected EPS growth rate of 17.7%.
Price and Consensus: PHM
Meritage Homes: Based in Scottsdale, AZ, Meritage Homes is one of the leading designers and builders of single-family homes. Its focus on entry-level LiVE.NOW homes has been a major driving factor. Although greater sales incentives have been impacting the company’s operating expenses, MTH is particularly focused on increasing gross margins and maximizing profits on every sale. To this end, it 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. Solid execution on its spec building and streamlined strategy helped it achieve yet another record backlog conversion rate of 138% and a return on equity of 18% during first-quarter 2024.
Meritage Homes — a Zacks Rank #3 stock — has gained 22.4% in the past year. Earnings estimates for 2024 have increased to $20.27 per share from $19.97 over the past seven days. The estimated figure indicates 1.7% year-over-year growth. The company’s earnings surpassed the Zacks Consensus Estimate in all the trailing four quarters, the average being 27%.
Price and Consensus: MTH
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5 Stocks to Watch From the Promising Homebuilding Industry
The lack of existing homes for sale in the market, along with a desire to own a home, has been driving demand for the U.S. housing space, defying the challenges associated with the high interest rate environment and rising raw material and labor costs. Prudent strategic efforts in maintaining a balance between speculative and build-to-order approaches have been helping companies target various buyer preferences and market segments effectively. Also, the companies’ focus on cost control, increased operating leverage, focus on mortgage rate buydown programs and important buyouts bode well for the Zacks Building Products - Home Builders industry players. Companies like D.R. Horton, Inc. (DHI - Free Report) , PulteGroup, Inc. (PHM - Free Report) , Meritage Homes Corporation (MTH - Free Report) , KB Home (KBH - Free Report) and M/I Homes, Inc. (MHO - Free Report) have been gaining from their fundamental strength and the above-mentioned tailwinds.
Industry Description
The Zacks Building Products - Home Builders industry comprises manufacturers of residential and commercial buildings. Some industry players are involved in providing financial services that include selling mortgages and collecting fees for title insurance agencies as well as closing services. The industry players are involved in building single-family detached and attached home communities; townhouses, condominiums, duplexes and triplexes; master-planned luxury residential resort-style golf communities; and urban low, mid, and high-rise communities. The companies are also involved in the purchase, development and sale of residential land. Additionally, the companies build and own multi-family rental properties, residential real estate, and oil and gas assets.
4 Trends Shaping the Homebuilding Industry's Future
Lack of Supply & Mortgage Buydown Programs: There is a sizable shortage of new as well as existing homes after more than a decade of under-building compared with population growth. Low housing inventory, the desire to own a home, and favorable demographic trends have been propelling growth in the new home market. Homebuilders anticipate this momentum to persist in the long run, buoyed by these factors. The economy's resilience, driven by steady job and income expansion, coupled with a surge in household formation surpassing pre-pandemic levels, underpins optimistic projections for the market's fundamental support in the coming months.
Meanwhile, the increased use of mortgage rate buydowns — temporary interest rate reductions offered along with the purchase of a new home to ease borrowers into the full mortgage payment for the beginning of a loan term — has been driving demand. Buydowns appear to be more of a marketing tool to offset the salience of high mortgage rates.
Cost-Control Efforts, Focus on Entry-Level Buyers & Acquisitions: 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.
Again, the majority of companies are focused on the growing demand for entry-level homes and addressing the need for lower-priced homes. Meanwhile, industry players have been acquiring other homebuilding companies in desirable markets, resulting in improved volumes, market share, revenues and profitability.
Rate Reductions Not Imminent: The Fed’s decision to uphold interest rates in the range of 5.25%-5.5% has been consistent since August 2023. Despite earlier suggestions by Fed officials of potential rate cuts, they now stress a more cautious approach contingent upon inflation levels. While concerns persist regarding inflation and its impact on borrowing costs, Fed chairman Jerome Powell clarified that the central bank is not currently considering reducing rates. This news is less favorable for the rate-sensitive housing industry, which contributes nearly 3% to the economy.
Affordability Issue & Tight Labor Market: The challenge of home affordability persists due to high mortgage rates. Despite indications from the Federal Reserve suggesting potential rate reductions instead of increases in the near term, homebuyers may continue to face financial constraints throughout the year. Additionally, as home construction expands in 2024, the market is expected to grapple with increasing supply-side hurdles, potentially resulting in elevated prices and/or shortages of lumber, available lots, and labor. Meanwhile, the shortage of skilled construction labor continues to be a pressing concern. With the rising demand for construction, the industry requires more skilled professionals, which is vital to America’s economy.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Building Products - Home Builders industry is a 16-stock group within the broader Zacks Construction sector. The industry currently carries a Zacks Industry Rank #106, which places it in the top 42% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of a higher earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. Since March 2024, the industry’s earnings estimates for 2024 have increased to $11.98 per share from $11.63.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Outperforms Sector and S&P 500
The Zacks Building Products - Home Builders industry has outperformed the S&P 500 Index and the broader Zacks Construction sector in the past year.
Over this period, the industry has gained 26% compared with the broader sector’s rise of 24.5%. The Zacks S&P 500 Composite has gained 25.1% over this period.
One-Year Price Performance
Industry's Current Valuation
On the basis of the forward 12-month price-to-earnings ratio, which is commonly used for valuing homebuilding stocks, the industry is currently trading at 10.22 compared with the S&P 500’s 22.01 and the sector’s 17.01.
Over the last five years, the industry has traded as high as 11.64X and as low as 4.18X, with a median of 9.08X, as the chart below shows.
Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500
5 Homebuilding Stocks in Focus
We have selected five stocks from the Zacks homebuilding space that currently carry a Zacks Rank #2 (Buy) or 3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
KB Home: Based in Los Angeles, CA, KB Home is a well-known homebuilder in the United States and one of the largest in the state. Homebuilding operations include building and designing homes that cater to first-time, move-up and active adult homebuyers on acquired or developed lands. The company's growth stems from the Returns-Focused Growth Plan, integrating core business strategy execution, enhanced asset efficiency, and the monetization of substantial deferred tax assets. Furthermore, its Built-to-Order system empowers buyers with extensive choices in crucial aspects of their prospective homes. Leveraging robust land acquisition strategies also contributes significantly to bolstering gross margins and returns.
KB Home — a Zacks Rank #2 stock — has surged 40.9% over the past year. KBH has seen an upward estimate revision of 3.7% for fiscal 2024 earnings over the past 30 days. The estimated figure indicates 18.2% year-over-year growth. Its earnings topped the consensus estimate in all the trailing four quarters, with the average surprise being 18.4%. Again, it carries an impressive VGM Score of B. This helps to identify stocks with the most attractive value, growth and momentum. KBH has a three-to-five-year expected EPS growth rate of 11.8%.
Price and Consensus: KBH
D.R. Horton: Based in Texas, this homebuilder offers a diverse range of homes across various price points through multi-brand platforms, including D.R. Horton, Emerald Homes, Express Homes, and Freedom Homes. The company boasts one of the broadest geographic diversities in the industry, ensuring it is not reliant on any single market. With 94,049 homes closed in the 12 months that ended on Mar 31, 2024, D.R. Horton has established itself as one of the largest homebuilders in the United States. The company’s impressive performance, industry-leading market share, strategic acquisitions, ample supply of land, lots, and homes, along with affordable product offerings across multiple brands, are expected to drive continued growth.
D.R. Horton — a Zacks Rank #2 stock — has rallied 18.8% over the past year. Its earnings topped consensus estimates in three of the trailing four quarters and missed on one occasion, with the average surprise being 15.6%. Again, it carries an impressive VGM Score of A. The Zacks Consensus Estimate for fiscal 2024 EPS indicates 3.4% year-over-year growth. DHI has a three-to-five-year expected EPS growth rate of 14.1%.
Price and Consensus: DHI
M/I Homes: This Columbus, OH-based builder of single-family homes has been gaining from a high level of performance across all its housing operations and the Mortgage and Title business. The company has a diverse product offering. It designs, markets, constructs and sells single-family homes and attached townhomes to first-time, millennial, move-up, empty-nester and luxury buyers under the M/I Homes brand name. A stellar backlog level has been helping the company to generate improved profits. Also, a higher return on equity bodes well. MHO remains optimistic about navigating the ongoing challenges, given its balance sheet strength, low debt levels, record backlog sales value, diverse product offerings and well-located communities.
M/I Homes — a Zacks Rank #3 stock — has surged 49.6% over the past year. Its earnings topped the consensus estimate in three of the trailing four quarters, with the average surprise being 19%. Again, it carries an impressive VGM Score of A. The Zacks Consensus Estimate for 2024 EPS indicates 12.2% year-over-year growth.
Price and Consensus: MHO
PulteGroup: Located in Atlanta, GA, this homebuilding company has been capitalizing on a cyclically resilient operating model, effective pricing strategy and mortgage rate buydown program. PulteGroup is effectively managing a balance between spec (speculative) and build-to-order approaches to drive growth by maintaining a strategic mix and responding to market conditions. By balancing spec and build-to-order homes, PulteGroup is able to address diverse buyer needs, remain flexible in response to market conditions, and leverage operational efficiencies to drive growth. PulteGroup's first-quarter 2024 results highlighted its robust ability to thrive in a prolonged high-rate environment. Despite market volatility, the company achieved a 14% year-over-year increase in net orders, raised net pricing in approximately half of its communities, and set a new company record for first-quarter gross margins at 29.6% (compared to guidance of 28% to 28.5%).
PulteGroup — a Zacks Rank #3 stock — has surged 42.3% in the past year. The Zacks Consensus Estimate for its 2024 EPS is expected to register 10% year-year-year growth. Its earnings topped the consensus estimate in all the trailing four quarters, with the average surprise being 12.5%. Again, it carries an impressive VGM Score of B. PHM has a three-to-five-year expected EPS growth rate of 17.7%.
Price and Consensus: PHM
Meritage Homes: Based in Scottsdale, AZ, Meritage Homes is one of the leading designers and builders of single-family homes. Its focus on entry-level LiVE.NOW homes has been a major driving factor. Although greater sales incentives have been impacting the company’s operating expenses, MTH is particularly focused on increasing gross margins and maximizing profits on every sale. To this end, it 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. Solid execution on its spec building and streamlined strategy helped it achieve yet another record backlog conversion rate of 138% and a return on equity of 18% during first-quarter 2024.
Meritage Homes — a Zacks Rank #3 stock — has gained 22.4% in the past year. Earnings estimates for 2024 have increased to $20.27 per share from $19.97 over the past seven days. The estimated figure indicates 1.7% year-over-year growth. The company’s earnings surpassed the Zacks Consensus Estimate in all the trailing four quarters, the average being 27%.
Price and Consensus: MTH