The housing market poses plenty of problems for prospective home buyers – from soaring prices to surging mortgage rates to lack of supply.
Within that context, Bank of America analysts offer a mixed outlook for the housing environment this year.
“The [Bank of America] U.S. economics team believes that higher rates and lower affordability will lead to a decline in existing-home sales in 2022 versus 2021, with the pace slowing further as the year progresses,” the analysts wrote in a commentary.
“But with supply of existing homes at just two months [the current sales rate], and demographics driving demand, the economists forecast another 15% increase in home-price appreciation this year.”
The Case-Shiller home price index jumped 19.8% in the 12 months through February.
“The best solution to the shortage is more supply,” the analysts said. “Despite supply-chain and labor constraints, we have seen the strongest pace of housing starts since 2006. Starts rose 0.3% in March from February and were up 3.9% from a year earlier.
“We expect more strength in starts, and the economics team believes demand will be underpinned by the historic need for more housing.”
Bank of America analysts cite several housing stocks that they like. Among homebuilders, analyst Rafe Jadrosich “prefers” Toll Brothers (TOL) and PulteGroup (PHM) if interest rates stabilize. And he favors D.R. Horton (DHI) in case of a mild recession.
Toll Brothers
Bank of America expects Toll Brothers to outperform its peers given:
1. “Cheap valuation relative to expected return on equity, compared to its previous numbers;
2. “TOL has yet to see the full impact of price increases, due to its longer building cycles;
3. “Roughly 75% of the owned land on its balance sheet was purchased prepandemic. [That’s] about a three-year supply and should provide a long runway for healthy margins; and,
4. “Resilient backlog and demand despite higher interest rates.”
PulteGroup
Bank of America expects PulteGroup to outperform its peers because:
1. “PHM is generating a higher return on equity than most peers in our coverage and trades at a discount relative to this ROE;
2. “PHM has a strong history of capital return, including a recently announced $1 billion share repurchase program; and
3. “Industry tailwinds and fundamentals remain strong, despite the recent increase in interest rates.”
D.R. Horton
BofA says D.R. Horton would outperform peers in a mild recession, given
1. “DHI has the highest percentage of lots controlled under options, providing it with the ability to exit land positions should they experience a significant drop in value;
2. “Its ability to deliver lower-price product in an environment where affordability is increasingly a headwind to buyers;
3. “DHI is better positioned to navigate the current supply chain challenges, due to its speculative building strategy and scale; and
4. “DHI holds leading market share in the fastest growing US markets.”
