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There is a nationwide shortage of 1.5 million housing units, NAHB Chairman Alicia Huey told lawmakers on Capitol Hill, where 700 builders had gathered on June 7, asking for specific measures to ease the nation’s housing affordability crisis.
It’s true that residential construction companies are seeing some real challenges. They have to navigate cost pressures, labor shortages, lot availability and cost issues, quality issues, and profitability concerns in order to succeed in this economy.
Tightening credit conditions on construction loans, stemming from the banking failures earlier this year, are making it more difficult for companies to secure financing for their projects.
The construction labor market is also very tight. The latest Jobs report shows that 25,000 construction jobs were added in May. Also, Bureau of Labor Statistics (BLS) data shows that there were 192,000 net construction adds since last May. However, there is still a shortage of 400,000 workers, according to the National Association of Home Builders (NAHB) estimates. This is leading to construction delays while increasing the cost of homebuilding projects, Bureau of Labor Statistics (BLS) data shows.
Since the inventory of under-construction homes is significant, homebuilders are focused on finishing these before starting new ones. This will immediately add to sagging inventory of finished homes. However, inefficiencies are creeping in with subcontractors often doing sub-optimal quality work because of all the haste.
Finishing old projects can also speed up occupancy and therefore, payments. This can help them pay off their loans sooner. With interest rates being where they are, finishing projects quickly can have a real impact on their bottom lines.
Because of all the above issues, affordability has become a tough nut to crack. Rising costs and limited supply of housing units have contributed to an affordability crisis in many areas. On the other hand, homebuilders are accountable to shareholders. Therefore, they have to try and maximize their profit. This has made it challenging for potential buyers to enter the housing market and has put additional pressure on residential construction companies to cater to the segment where demand is the highest.
If all these arguments paint a somewhat negative picture, it’s important to remember the demand situation. It isn’t that builders can’t sell what they’re making (a crisis situation) but simply that builders can’t make enough. Therefore, the market is really hot and you’d have to be crazy not having a play in it. So, here are a few stocks that you may want to consider buying:
With its 2023 estimate up 11.5% in the last 60 days and the 2024 estimate up 7.6%, this Zacks Rank #1 (Strong Buy) stock with Value and Growth Scores of A and B, respectively, looks like a solid pick.
On the basis of price-to-earnings (P/E) ratio, the shares currently trade at a 40.7% discount to the industry and a 68.9% discount to the S&P 500.
Meritage is also seeing significant estimate revisions. In the last 60 days, the Zacks Consensus Estimate increased 21.3% for 2023 and 18.3% for 2024. The Zacks Rank #1 stock have Value and Growth Scores of B and C, respectively.
At 8.1X P/E, the shares trade at a discount of 19.3% to the industry and 57.7% to the S&P 500.
Analysts appear to be hugely optimistic about this stock. In the last 60 days, its 2023 estimate has increased 23.1% while the 2024 estimate increased 24.7%. Therefore, the shares carry a Zacks Rank #1. The Value and Growth Scores on this stock are B and D, respectively.
Although at a slight discount of just 2.2% to the industry, the shares trade at a 48.8% discount to the S&P 500.
Both 2023 and 2024 estimates for Toll Brothers stock are up significantly. For 2023, the Zacks Consensus Estimate is up 19.6% and for 2024, it’s up 29.3%. The shares carry a Zacks Rank #1 with Value and Growth Scores of A and B, respectively.
The shares trade at a 28.3% discount to the industry and a 62.4% discount to the S&P 500.
The Zacks Rank #1 stock with Value Score of A and Growth Score of C has seen significant increases in its estimates for this year and the next. Its 2023 estimate is up 11.0% and 2024 estimate is up 4.2% in the last 60 days.
On the basis of P/E, the shares trade at significant discounts of 46.1% to the industry and 71.8% to the S&P 500.
Conclusion
The industry is not without its challenges. However, the demand situation is very positive because the shortfall in new homes cannot be made good very quickly, even if macro factors played no role. Additionally, the improving prospects are clearly not reflected in prices yet, which is the formula for continued appreciation in share prices.
One-Month Price Performance
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5 Construction Stocks Looking Hot Right Now
There is a nationwide shortage of 1.5 million housing units, NAHB Chairman Alicia Huey told lawmakers on Capitol Hill, where 700 builders had gathered on June 7, asking for specific measures to ease the nation’s housing affordability crisis.
It’s true that residential construction companies are seeing some real challenges. They have to navigate cost pressures, labor shortages, lot availability and cost issues, quality issues, and profitability concerns in order to succeed in this economy.
Tightening credit conditions on construction loans, stemming from the banking failures earlier this year, are making it more difficult for companies to secure financing for their projects.
The construction labor market is also very tight. The latest Jobs report shows that 25,000 construction jobs were added in May. Also, Bureau of Labor Statistics (BLS) data shows that there were 192,000 net construction adds since last May. However, there is still a shortage of 400,000 workers, according to the National Association of Home Builders (NAHB) estimates. This is leading to construction delays while increasing the cost of homebuilding projects, Bureau of Labor Statistics (BLS) data shows.
Since the inventory of under-construction homes is significant, homebuilders are focused on finishing these before starting new ones. This will immediately add to sagging inventory of finished homes. However, inefficiencies are creeping in with subcontractors often doing sub-optimal quality work because of all the haste.
Finishing old projects can also speed up occupancy and therefore, payments. This can help them pay off their loans sooner. With interest rates being where they are, finishing projects quickly can have a real impact on their bottom lines.
Because of all the above issues, affordability has become a tough nut to crack. Rising costs and limited supply of housing units have contributed to an affordability crisis in many areas. On the other hand, homebuilders are accountable to shareholders. Therefore, they have to try and maximize their profit. This has made it challenging for potential buyers to enter the housing market and has put additional pressure on residential construction companies to cater to the segment where demand is the highest.
If all these arguments paint a somewhat negative picture, it’s important to remember the demand situation. It isn’t that builders can’t sell what they’re making (a crisis situation) but simply that builders can’t make enough. Therefore, the market is really hot and you’d have to be crazy not having a play in it. So, here are a few stocks that you may want to consider buying:
M/I Homes, Inc. (MHO - Free Report)
With its 2023 estimate up 11.5% in the last 60 days and the 2024 estimate up 7.6%, this Zacks Rank #1 (Strong Buy) stock with Value and Growth Scores of A and B, respectively, looks like a solid pick.
On the basis of price-to-earnings (P/E) ratio, the shares currently trade at a 40.7% discount to the industry and a 68.9% discount to the S&P 500.
Meritage Homes Corporation (MTH - Free Report)
Meritage is also seeing significant estimate revisions. In the last 60 days, the Zacks Consensus Estimate increased 21.3% for 2023 and 18.3% for 2024. The Zacks Rank #1 stock have Value and Growth Scores of B and C, respectively.
At 8.1X P/E, the shares trade at a discount of 19.3% to the industry and 57.7% to the S&P 500.
D.R. Horton, Inc. (DHI - Free Report)
Analysts appear to be hugely optimistic about this stock. In the last 60 days, its 2023 estimate has increased 23.1% while the 2024 estimate increased 24.7%. Therefore, the shares carry a Zacks Rank #1. The Value and Growth Scores on this stock are B and D, respectively.
Although at a slight discount of just 2.2% to the industry, the shares trade at a 48.8% discount to the S&P 500.
Toll Brothers, Inc. (TOL - Free Report)
Both 2023 and 2024 estimates for Toll Brothers stock are up significantly. For 2023, the Zacks Consensus Estimate is up 19.6% and for 2024, it’s up 29.3%. The shares carry a Zacks Rank #1 with Value and Growth Scores of A and B, respectively.
The shares trade at a 28.3% discount to the industry and a 62.4% discount to the S&P 500.
Beazer Homes USA, Inc. (BZH - Free Report)
The Zacks Rank #1 stock with Value Score of A and Growth Score of C has seen significant increases in its estimates for this year and the next. Its 2023 estimate is up 11.0% and 2024 estimate is up 4.2% in the last 60 days.
On the basis of P/E, the shares trade at significant discounts of 46.1% to the industry and 71.8% to the S&P 500.
Conclusion
The industry is not without its challenges. However, the demand situation is very positive because the shortfall in new homes cannot be made good very quickly, even if macro factors played no role. Additionally, the improving prospects are clearly not reflected in prices yet, which is the formula for continued appreciation in share prices.
One-Month Price Performance
Image Source: Zacks Investment Research