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Low consumer confidence, declining spending on private residential construction and rising material costs are marring the prospects of the Zacks Building Products - Home Builders industry. Consumers are adopting a more cautious stance toward their disposable income and appearing to shift toward essentials.
Nonetheless, the Fed's recent rate cut, combined with the shortage of homes available for sale and the strong demand for homeownership, is expected to drive growth for the industry players. Companies have been implementing effective strategies, such as buydown programs and balancing speculative building with build-to-order approaches, to meet diverse buyer preferences and market segments.
A focus on cost control, increased operating leverage, a balanced operating model, asset-light strategies and key acquisitions are benefiting companies like Lennar Corp., PulteGroup, Inc., NVR, Inc., M/I Homes, Inc. and Century Communities, Inc.
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
Affordability Issue & Shortage of Skilled Labor: The challenge of home affordability persists in the industry. 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.
Declining Spending on Private Residential Construction: Private residential construction spending saw a modest decline of 0.3% in August, according to data from the U.S. Census Bureau. Despite the monthly dip, spending was up 2.7% year over year, as analyzed by the National Association of Home Builders (NAHB). The reduction in overall private construction spending was largely influenced by decreased investment in both single-family and multifamily construction.
Single-family construction spending dropped by 1.5% in August, marking the fifth consecutive month of decline. Similarly, multifamily construction spending experienced a slight decline, dropping by 0.4% in August, following a 0.3% decrease in July. With the expectation of future interest rate adjustments, the housing market may continue to experience volatility in the months ahead.
This, combined with declining consumer confidence, casts a bleak outlook for the homebuilding industry. In September, consumer confidence took a sharp downturn, with the Conference Board's index dropping from 105.6 in August to 98.7, marking the steepest decline since August 2021. Consumers grew more pessimistic about the economy, especially regarding employment and business conditions. Their perception of current business conditions became negative, and they voiced increasing concerns about future labor market prospects, business outlook and income stability.
Lower Rates, Lack of Supply & Mortgage Buydown Programs: The recent 50-basis point interest rate cut by the Federal Reserve is expected to provide a notable boost to the U.S. homebuilding industry. This makes home loans more affordable for prospective buyers, stimulating demand for new homes as lower mortgage rates make borrowing less expensive. On the other hand, homebuilders also stand to gain from lower borrowing costs as they often rely on loans to finance their projects. On a further encouraging note, Jerome Powell hinted at two additional rate cuts in 2024 and expects the cuts to continue into 2025.
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. 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 #150, which places it in the bottom 40% 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.
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 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 surged 78.1% compared with the broader sector’s rise of 54.2%. The Zacks S&P 500 composite has risen 33.9% over this period.
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 11.36 compared with the S&P 500’s 21.57 and the sector’s 18.33.
Over the last five years, the industry has traded as high as 11.64X and as low as 4.18X, with a median of 9.04X.
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 #2 stock — has surged 97.5% in the past year. PHM has seen an upward estimate revision of 0.6% for 2024 earnings over the past 60 days. The Zacks Consensus Estimate for its 2024 EPS is expected to register 14% year-year-year growth. Its earnings topped the consensus estimate in each of the trailing four quarters, with the average surprise being 10%. It carries an impressive VGM Score of B. PHM has a three-to-five-year expected EPS growth rate of 19%.
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 #2 stock — has surged 62.2% in the past year. NVR has seen an upward estimate revision for 2024 earnings over the past 30 days by 0.2%. The estimated figure indicates 8.1% year-over-year growth. The company’s earnings surpassed the Zacks Consensus Estimate in three of the trailing four quarters and missed on one occasion, the average being 5.6%.
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 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 108.5% over the past year. MHO has seen an upward estimate revision for 2024 earnings over the past 60 days by 1%. The Zacks Consensus Estimate for 2024 EPS indicates 21.9% year-over-year growth. Its earnings topped the consensus estimate in three of the trailing four quarters and missed on one occasion, with the average surprise being 4.8%. It carries an impressive VGM Score of B.
Lennar: Based in Miami, FL, Lennar is engaged in homebuilding and financial services in the United States. Lennar's strong performance in the first two quarters of 2024 highlights its ability to navigate shifting market conditions, supported by solid demand and operational efficiency. Despite ongoing challenges related to affordability and market volatility, the company's strategic emphasis on an asset-light approach and steady production is expected to drive continued success throughout 2024 and into the future.
LEN — a Zacks Rank #3 stock — has rallied 71.5% in the past year. NVR has seen an upward estimate revision for 2024 earnings over the past 30 days by 0.7%. The company’s earnings surpassed the Zacks Consensus Estimate in three of the trailing four quarters, the average being 10.3%. It carries an impressive VGM Score of B.
Century Communities: Based in Greenwood Village, CO, Century Communities is a leading homebuilder in the United States, operating under two brands — Century Communities and Century Complete. It is present in 18 states and more than 45 markets, engaging in all facets of homebuilding, from land acquisition to sales.
The company targets a broad range of homebuyers, with a significant focus on the entry-level segment. CCS employs a land-light operating model, focusing on quick move-in ready/spec homes to reduce the time between contract, closing and delivery. This strategy enhances cost visibility, margin protection and quicker inventory turns. The company's concentration in the affordable entry-level market aligns it with strong demand and demographic trends.
CCS — a Zacks Rank #3 stock — has surged 61.2% in the past year. CCS has seen an upward estimate revision for 2024 earnings over the past 30 days by 0.8%. The estimated figure indicates 32.5% year-over-year growth. The company’s earnings surpassed the Zacks Consensus Estimate in three of the trailing four quarters, the average being 35.6%.
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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.
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.
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Zacks Industry Outlook Lennar, PulteGroup, NVR, M/I Homes and Century Communities
For Immediate Release
Chicago, IL – October 7, 2024 – Today, Zacks Equity Research Lennar Corp. (LEN - Free Report) , PulteGroup, Inc. (PHM - Free Report) , NVR, Inc. (NVR - Free Report) , M/I Homes, Inc. (MHO - Free Report) and Century Communities, Inc. (CCS - Free Report) .
Industry: Homebuilding
Link: https://www.zacks.com/commentary/2345860/5-homebuilding-stocks-ready-to-soar-defying-industry-challenges?art_rec=quote-stock_overview-zacks_news-ID01-txt-2345860
Low consumer confidence, declining spending on private residential construction and rising material costs are marring the prospects of the Zacks Building Products - Home Builders industry. Consumers are adopting a more cautious stance toward their disposable income and appearing to shift toward essentials.
Nonetheless, the Fed's recent rate cut, combined with the shortage of homes available for sale and the strong demand for homeownership, is expected to drive growth for the industry players. Companies have been implementing effective strategies, such as buydown programs and balancing speculative building with build-to-order approaches, to meet diverse buyer preferences and market segments.
A focus on cost control, increased operating leverage, a balanced operating model, asset-light strategies and key acquisitions are benefiting companies like Lennar Corp., PulteGroup, Inc., NVR, Inc., M/I Homes, Inc. and Century Communities, Inc.
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
Affordability Issue & Shortage of Skilled Labor: The challenge of home affordability persists in the industry. 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.
Declining Spending on Private Residential Construction: Private residential construction spending saw a modest decline of 0.3% in August, according to data from the U.S. Census Bureau. Despite the monthly dip, spending was up 2.7% year over year, as analyzed by the National Association of Home Builders (NAHB). The reduction in overall private construction spending was largely influenced by decreased investment in both single-family and multifamily construction.
Single-family construction spending dropped by 1.5% in August, marking the fifth consecutive month of decline. Similarly, multifamily construction spending experienced a slight decline, dropping by 0.4% in August, following a 0.3% decrease in July. With the expectation of future interest rate adjustments, the housing market may continue to experience volatility in the months ahead.
This, combined with declining consumer confidence, casts a bleak outlook for the homebuilding industry. In September, consumer confidence took a sharp downturn, with the Conference Board's index dropping from 105.6 in August to 98.7, marking the steepest decline since August 2021. Consumers grew more pessimistic about the economy, especially regarding employment and business conditions. Their perception of current business conditions became negative, and they voiced increasing concerns about future labor market prospects, business outlook and income stability.
Lower Rates, Lack of Supply & Mortgage Buydown Programs: The recent 50-basis point interest rate cut by the Federal Reserve is expected to provide a notable boost to the U.S. homebuilding industry. This makes home loans more affordable for prospective buyers, stimulating demand for new homes as lower mortgage rates make borrowing less expensive. On the other hand, homebuilders also stand to gain from lower borrowing costs as they often rely on loans to finance their projects. On a further encouraging note, Jerome Powell hinted at two additional rate cuts in 2024 and expects the cuts to continue into 2025.
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. 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 #150, which places it in the bottom 40% 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.
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 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 surged 78.1% compared with the broader sector’s rise of 54.2%. The Zacks S&P 500 composite has risen 33.9% over this period.
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 11.36 compared with the S&P 500’s 21.57 and the sector’s 18.33.
Over the last five years, the industry has traded as high as 11.64X and as low as 4.18X, with a median of 9.04X.
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.
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 #2 stock — has surged 97.5% in the past year. PHM has seen an upward estimate revision of 0.6% for 2024 earnings over the past 60 days. The Zacks Consensus Estimate for its 2024 EPS is expected to register 14% year-year-year growth. Its earnings topped the consensus estimate in each of the trailing four quarters, with the average surprise being 10%. It carries an impressive VGM Score of B. PHM has a three-to-five-year expected EPS growth rate of 19%.
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 #2 stock — has surged 62.2% in the past year. NVR has seen an upward estimate revision for 2024 earnings over the past 30 days by 0.2%. The estimated figure indicates 8.1% year-over-year growth. The company’s earnings surpassed the Zacks Consensus Estimate in three of the trailing four quarters and missed on one occasion, the average being 5.6%.
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 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 108.5% over the past year. MHO has seen an upward estimate revision for 2024 earnings over the past 60 days by 1%. The Zacks Consensus Estimate for 2024 EPS indicates 21.9% year-over-year growth. Its earnings topped the consensus estimate in three of the trailing four quarters and missed on one occasion, with the average surprise being 4.8%. It carries an impressive VGM Score of B.
Lennar: Based in Miami, FL, Lennar is engaged in homebuilding and financial services in the United States. Lennar's strong performance in the first two quarters of 2024 highlights its ability to navigate shifting market conditions, supported by solid demand and operational efficiency. Despite ongoing challenges related to affordability and market volatility, the company's strategic emphasis on an asset-light approach and steady production is expected to drive continued success throughout 2024 and into the future.
LEN — a Zacks Rank #3 stock — has rallied 71.5% in the past year. NVR has seen an upward estimate revision for 2024 earnings over the past 30 days by 0.7%. The company’s earnings surpassed the Zacks Consensus Estimate in three of the trailing four quarters, the average being 10.3%. It carries an impressive VGM Score of B.
Century Communities: Based in Greenwood Village, CO, Century Communities is a leading homebuilder in the United States, operating under two brands — Century Communities and Century Complete. It is present in 18 states and more than 45 markets, engaging in all facets of homebuilding, from land acquisition to sales.
The company targets a broad range of homebuyers, with a significant focus on the entry-level segment. CCS employs a land-light operating model, focusing on quick move-in ready/spec homes to reduce the time between contract, closing and delivery. This strategy enhances cost visibility, margin protection and quicker inventory turns. The company's concentration in the affordable entry-level market aligns it with strong demand and demographic trends.
CCS — a Zacks Rank #3 stock — has surged 61.2% in the past year. CCS has seen an upward estimate revision for 2024 earnings over the past 30 days by 0.8%. The estimated figure indicates 32.5% year-over-year growth. The company’s earnings surpassed the Zacks Consensus Estimate in three of the trailing four quarters, the average being 35.6%.
Why Haven't You Looked at Zacks' Top Stocks?
Since 2000, our top stock-picking strategies have blown away the S&P's +7.0 average gain per year. Amazingly, they soared with average gains of +44.9%, +48.4% and +55.2% per year.
Today you can access their live picks without cost or obligation.
See Stocks Free >>
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.
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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.