Homebuilder stocks are charging higher in 2023, as the U.S. housing market tightens. An already undersupplied housing market is seeing strong demand especially for new homes, as fewer existing houses enter the market amid rising interest and mortgage rates.
The IBD Building-Residential/Commercial industry group ranks No. 5 out of 197 groups tracked by IBD. Homebuilder stocks collectively advanced 29% so far in 2023. Homebuilder stocks KB Home, PulteGroup and Taylor Morrison Home have all shot up around 50% so far in 2023.
Toll Brothers has jumped more than 40%. Among the group's largest players, D.R. Horton has leapt 25% so far this year. Lennar has gained 24%.
Action over the past few days has sent most of those stocks to news highs, with several taking out buy points in the process.
Earlier this year, homebuilders began performing well as analysts and companies predicted the housing market would pick up steam. That view was partially accurate. Demand has climbed. But owners of existing homes are tending to sit tight, rather than trade in their low-rate mortgages for a newer home at a higher rate.
That has left homebuilders as the major suppliers to the market.
The U.S. Housing Shortage
The U.S. is in a long-term housing shortage, with the construction of new homes failing to keep pace with the growing population. Rising materials costs, supply chain issues and labor shortages since the Covid pandemic have exacerbated the issue.
The U.S. currently faces a shortage of 5.5 million homes, according to the National Association of Realtors. The gap is so large it would take more than a decade to close, NAR says, even if new-home construction accelerates.
However, new home sales improved for the fifth straight month in April, the Commerce Department reported on May 23, the most recent data available. The rise was modest, from a seasonally adjusted annual rate of 656,000 to 686,000. But it was in stark contrast to falling sales rates for existing homes, as homeowners sit tight.
"Home sales are bouncing back and forth but remain above recent cyclical lows," NAR economist Lawrence Yun said in a May 18 news release. "The combination of job gains, limited inventory and fluctuating mortgage rates over the last several months has created an environment of push-pull housing demand."
Toll Brothers CEO Douglas Yearley told analysts in late May he expects the shortage of homes for sale in the U.S. will continue as homeowners are "reluctant to give up their low-rate mortgages. "
"We believe the resulting supply — demand imbalance will continue well into the future, adding to the long-term tailwinds that have supported the housing industry in recent years," Yearley said.
Homebuilder Stock D.R. Horton Powers Up On Earnings
On April 19, D.R. Horton easily beat a low bar for earnings and revenue estimates for the second quarter, while giving upbeat revenue guidance for the full year. DHI shares leapt 8.5% in the week of the financial report, breaking out above a 98.99 buy point in a cup-with-handle pattern.
D.R. Horton stock is now pressing to new highs, trading 15% above that previous buy point.
D.R. Horton stock ranks 14th in IBD's Building-Residential/Commercial industry group. The homebuilder stock has a 91 Composite Rating out of 99. DHI also has a 95 Relative Strength Rating. The EPS Rating is 78 out of 99.
Arlington, Texas-based D.R. Horton is the largest homebuilder in the U.S., measured by market capitalization. It operates in 33 states. The company saw fiscal Q2 profits slip 32% to $2.73 per share. Revenue remained flat, dropping 0.4% to $7.97 billion. Analysts expect full-year earnings to retreat 32% from 2022 highs, coming in at $11.14 per share for 2023, according to FactSet.
"Although higher interest rates and economic uncertainty may persist for some time, the supply of both new and existing homes at affordable price points remains limited, and demographics supporting housing demand remain favorable," company Chair Don Horton told investors in April.
Toll Brothers Gathers Momentum
On May 23, luxury-home builder Toll Brothers reported better-than-expected second-quarter profits and revenue buoyed by increased home deliveries and surging unit prices compared to 2022.
Similar to DHI, Toll Brothers stock advanced nearly 7% in the two days following earnings. TOL shares are currently consolidating near all time highs and have advanced around 47% in 2023.
TOL stock has a 98 Composite Rating out of 99. It also has a 96 Relative Strength Rating. The EPS Rating is 97 out of 99.
Toll Brothers expects full-year deliveries of 8,900-9,500 units. The homebuilder sees the average delivered price per home in Q3 at $1.005 million-$1.025 million. For the full year, Toll Brothers expects average prices of $975,000-$995,000.
Toll Brothers' previous full-year predictions were for 8,000-9,000 units delivered with selling prices of $965,000-$985,000.
Analysts view full-year profits slipping 2% to $10.66 per share in 2023 with sales falling 11% to $9.15 billion, according to FactSet.
Houses, Mortgages And Interest Rates
The key determinant of interest rates for mortgages is the federal funds target rate set by the Federal Reserve. This rate determines the overnight lending rate among U.S. banks.
The Fed, attempting to cool rapidly rising inflation, has raised its target rate in each of its past 10 meetings. Higher interest and mortgage rates tend to reduce housing demand, keeping the supply of existing homes low, according to experts.
The Fed's next policy decision is due on June 14. CME's FedWatch Tool shows some 72.5% of investors expect no change to the Fed's current target rate of 5% to 5.25%. (That's up from 0% to 0.25% in mid-March last year.) Another 27.5% expect an increase of 0.25%.
Treasury yields have advanced ahead of the decision, with the 10-year Treasury yield rebounding from early-May lows. On Thursday, the 10-year Treasury yield hovered around 3.78%.
The Mortgage Bankers' Association (MBA) reported Wednesday that applications for home purchases dropped 1.4% in the week ending June 2, slipping for the fourth straight week to the second lowest point since 1995. The contract rate on a 30-year fixed mortgage decreased 10 basis points to 6.81%, according to the data.
MBA deputy chief economist Joel Kan said in a statement that overall mortgage applications were more than 30% lower than a year ago as borrowers "grapple with the higher rate environment."
"Activity is constrained by reduced purchasing power from higher rates and the ongoing lack of for-sale inventory in the market, while there continues to be very little rate incentive for refinance borrowers," Kan said.
Homebuilder Stocks Look To Capitalize
At the beginning of June, the National Association of Home Builders proclaimed the limited inventory of existing homes has placed a renewed emphasis on new construction. That gives new home construction an increased piece of the housing market as many homeowners with loans well below current mortgage rates elect to stay put.
"Buyers are purchasing new homes so they can start investing in homeownership now instead of waiting for an existing home to come on the market," NAHB Chair Alicia Huey said in a statement.
However, homebuilders face challenges in meeting that demand. Single-family home building has slowed significantly since Covid pandemic-fueled highs, according to the latest findings from the NAHB Q1 Home Building Geography Index.
"Higher interest rates and construction costs, along with shortages of key materials such as transformers and concrete, have contributed to all single-family markets posting a negative year-over-year building growth rate," NAHB Chief Economist Robert Dietz said in a statement Tuesday.
Homebuilder Stocks Look To Continue Growth Trend
Several homebuilders will report financials in the coming days. Lennar announces its fiscal second-quarter earnings Wednesday. KB Home is expected to report its fiscal Q2 earnings on June 21. Homebuilders PulteGroup and Taylor Morrison Home will announce financials in July, which could give a lift to homebuilder stocks.
LEN shares have jumped more than 6% in June and are currently around 2% below May highs.
Wall Street expects Lennar EPS to sink 49% to $2.31 with revenue sliding 14% to $7.19 billion. Analysts forecast full-year profits dropping 36% to $10.01 per share and sales declining 13% to $29.35 billion.
Lennar earnings decelerated over the past four quarters from a 59% jump in Q2 last year to a 21% decline in Q1. Revenue gains slowed from 30% growth in the second quarter last year to a 5% increase last quarter.
Barclays raised its price target on the homebuilder stock to 135 from 120 on May 24 and has maintained an "Overweight" rating on the shares. On March 31, Deutsche Bank initiated coverage with a sell rating and a 105 price target.
Are Homebuilder Stocks 'Due For A Breather'?
Analyst Matthew Bouley said in a research note investors still fail to appreciate the positive impact that low home inventory will have on new construction, as well as the implications for builders and suppliers. Overall, housing is still under pressure. But new construction is improving and in a "much stronger place," Bouley wrote.
Meanwhile, Deutsche Bank initiated coverage of KB Home on May 31, giving KBH shares a "Hold" rating and a 49 price target. Looking at nine homebuilder stocks, analyst Joe Ahlersmeyer wrote investors are questioning whether shares might be "due for a breather" after rallying 40%-80% off late October lows.
Regarding his sell rating for Lennar stock, the analyst sees Lennar "fundamentally underperforming" DHI within the homebuilding business over the near, medium and longer term.
In afternoon trade on Thursday, D.R. Horton, Pulte Group, Toll Brothers, Taylor Morrison Home, KB Home, Tri Pointe Homes and MDC Holdings were among those notching new highs. NVR was rising in a flat base. Meritage Homes was just below a flat base buy point. Lennar was rebounding from 10-week support, just below its recent highs ahead of earnings.
Please follow Kit Norton on Twitter @KitNorton for more coverage.
