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3 Homebuilding Stocks for Higher Return Defying Industry Challenges

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The U.S. homebuilding industry is navigating a complex set of challenges due to elevated mortgage rates. Also, high construction costs and a persistent shortage of buildable lots are marring the prospects of the Zacks Building Products - Home Builders industry. Builders face mounting financial pressures due to rising material and labor expenses, which constrain their ability to price homes competitively. Additionally, the Federal Reserve’s cautious stance on rate cuts reflects ongoing economic uncertainty, prompting consumers to prioritize essential spending and adopt a more frugal approach to their disposable income.

Despite these hurdles, the industry remains poised for growth. Factors such as the Fed's eventual rate cuts, a limited supply of homes for sale, and strong demand for homeownership are expected to bolster the sector. Industry players are employing strategies like mortgage buydown programs and a mix of speculative building with build-to-order projects to cater to diverse buyer needs. Companies like NVR, Inc. (NVR - Free Report) , PulteGroup, Inc. (PHM - Free Report) , and Taylor Morrison Home Corporation (TMHC - Free Report) are also benefiting from initiatives focused on cost management, enhanced operating leverage, balanced business models, asset-light strategies, and strategic acquisitions.

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. 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

High Rates & Elevated Construction Costs: Persistent challenges continue to hinder the U.S. homebuilding industry, including high interest rates, elevated construction costs, and a shortage of buildable lots. The National Association of Home Builders (NAHB) anticipates further interest rate cuts from the Federal Reserve in 2025. However, due to ongoing inflationary pressures, the projected reduction in the federal funds rate has been lowered from 100 basis points (bps) to 75 bps. Inflation concerns are likely to keep long-term interest rates, such as mortgage rates, near their current levels, with rates expected to remain above 6%.

For the week ended Jan. 2, the benchmark 30-year fixed mortgage rate climbed to 6.91%—the highest since July—from 6.85% the previous week, according to Freddie Mac. This marks a significant increase from 6.62% a year ago. Similarly, the average rate for a 15-year fixed-rate mortgage rose to 6.13% from 6%, the highest since July, compared with 5.89% a year prior.

The housing market also grapples with elevated construction costs and a continued shortage of buildable lots, further constraining homebuilders. Rising material and labor expenses have strained builders’ finances, forcing many to implement price reductions and sales incentives to attract buyers. In December, 31% of builders reduced home prices, with an average discount of 5%, while 60% offered additional incentives to boost sales. Despite these measures, builder confidence remains muted. The NAHB/Wells Fargo Housing Market Index (HMI) held steady at 46 in December, below the critical threshold of 50, indicating ongoing pessimism. Meanwhile, the Fed now anticipates reducing their benchmark rate by a quarter-point only twice in 2025, a significant revision from their September estimate of four rate cuts.

Economic Uncertainties & Shortage of Skilled Labor: Economic uncertainties, including potential tariff increases under the new administration, could exacerbate inflationary pressures, further clouding the outlook. 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.

Lower Rates, Lack of Supply & Mortgage Buydown Programs: In 2024, the Federal Reserve cut the federal funds rate three times, totaling 100 bps, bringing it to 4.25%–4.50%. Anticipated rate cuts in 2025, an improving U.S. job market, and growing acceptance of the new mortgage rate benchmark are stabilizing the housing market. The November 2024 numbers of the existing and new home sales also reflect the improving trend across the housing market.

There is a sizable shortage of new and 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. The companies are also 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.

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 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. Meanwhile, industry players have been acquiring other homebuilding companies in desirable markets, resulting in improved volumes, market share, revenues and profitability.

Zacks Industry Rank Indicates Bleak 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 #192, which places it in the bottom 23% 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 dim 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 bottom 50% of the Zacks-ranked industries is a result of a lower earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since October 2024, the industry’s earnings estimates for 2025 have decreased to $12.02 per share from $13.01.

Despite the industry’s blurred near-term view, we will present a few stocks that one may consider adding to their portfolio. Before that, it’s worth taking a look at the industry’s shareholder returns and current valuation.

Industry Lags Sector and S&P 500

The Zacks Building Products - Home Builders industry has underperformed the S&P 500 Index and the broader Zacks Construction sector in the past year.

In the past year, the industry has declined 2.4% against the broader sector’s rise of 14.4%. The Zacks S&P 500 Composite has risen 24.4% 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 9.54 compared with the S&P 500’s 22.85 and the sector’s 17.26.

Over the last five years, the industry has traded as high as 11.74X and as low as 4.18X, with a median of 9.04X, as the chart below shows.

Industry’s P/E Ratio (Forward 12-Month) vs. S&P 500

3 Homebuilding Stocks in Focus

We have selected three 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.

Taylor Morrison: Based in Scottsdale, AZ, the company operates as a public homebuilder in the United States. The company is benefiting from a steady mix of to-be-built and spec homes, strategic land investments and a balanced capital allocation approach to ensure shareholder value. During the first nine months of 2024, the company witnessed 12.3% year-over-year growth in home closings, with home closing revenues growing 7%. New orders, during the same time frame, rose 13.7% year over year to 9,627 units, with new order revenues increasing 9.8% to $5.77 billion.

Taylor Morrison— a Zacks Rank #3 stock — has rallied 17.9% in the past year. The Zacks Consensus Estimate for its 2025 earnings per share (EPS) is expected to register 11.2% year-year-year growth. Its earnings topped the consensus estimate in each of the trailing four quarters, with the average surprise being 11.5%.

Price and Consensus: TMHC

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. Its land management and flexibility strategy plays a critical role in its financial success.

PulteGroup — a Zacks Rank #3 stock — has gained 6.1% in the past year. PHM has seen an upward estimate revision for 2025 earnings to $13.39 from $13.36 per share over the past seven days. The Zacks Consensus Estimate for its 2025 EPS is expected to register a 0.3% year-year-year decline. Its earnings topped the consensus estimate in each of the trailing four quarters, with the average surprise being 10.9%. It carries an impressive VGM Score of A. PHM has a three-to-five-year expected EPS growth rate of 18.8%.

Price and Consensus: PHM



NVR: This Reston, VA-based homebuilder is engaged in the construction and sale of single-family detached homes, townhomes and condominium buildings, all of which are primarily constructed on a pre-sold basis. In order to serve homebuilding customers, NVR operates a mortgage banking and title services business. A disciplined business model and a focus on maximizing liquidity and minimizing risks have been aiding NVR. The lot acquisition strategy helps the company avoid financial requirements and risks associated with direct land ownership and land development. This strategy allows it to gain efficiencies and a competitive edge over its peers.

NVR — a Zacks Rank #3 stock — has gained 14.2% in the past year. The estimated figure indicates 7.4% year-over-year growth. The company’s earnings surpassed the Zacks Consensus Estimate in two of the trailing four quarters and missed on two other occasions, the average being 2.6%. It carries an impressive VGM Score of B. NVR has a three-to-five-year expected EPS growth rate of 14.2%.

Price and Consensus: NVR



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