Warren Buffett-backed D.R. Horton received an upgrade from Goldman Sachs Monday as homebuilder stocks enter a crucial week. Key housing reports out Tuesday, Wednesday and Thursday could bolster or undercut the industry group, which is caught up between key levels of support and resistance. DHI shares climbed Monday.
Goldman Sachs analyst Susan Maklari on Monday upgraded D.R. Horton to buy from neutral. Maklari trimmed the stock's price target to 131, from 132 — still 26% above where shares finished Friday. Maklari wrote Monday that limited for-sale inventory, constrained affordability and greater velocity in mortgage rates should drive increased consumer preference for quick move-in homes.
The analyst added that economic uncertainty and seasonality will likely be a near-term overhang, but that D.R. Horton "should leverage its operating acumen" against those challenges.
Goldman Sachs' optimistic note on DHI follows Evercore ISI analyst Stephen Kim last week nominally lowering the firm's price target on D.R. Horton shares to 160 from 162. Kim expects the Q3 earnings season is "likely to be a downbeat affair."
Key Week For Real Estate Stocks
Warren Buffett-backed DHI edged up 0.8% to 104.52 during Monday's market action. On Friday, D.R. Horton stock advanced 1.3% to 103.66.
Meanwhile, homebuilder stocks will be under a microscope this week. Housing starts, building permits and existing home sales for September are all due, along with the National Association of Homebuilders' sentiment survey for October.
Homebuilder stocks have collectively found some support at their 200-day moving average after a September peak. However, last week's rally attempt failed — reversing off resistance at the group's 50-day moving average.
Warren Buffett Takes Positions In Homebuilder Stocks
The stocks rallied aggressively through the first half of the year, as rising interest rates slowed sales of existing houses, channeling demand into the market for newly built homes.
The Building-Residential/Commercial industry group ranks a lofty No. 20 out of 197 groups tracked by IBD. Homebuilder stocks collectively have advanced more than 29% so far in 2023 — though they have pulled back sharply from an early September high.
During that run-up, Warren Buffett's Berkshire Hathaway bet on the supply-constrained U.S. housing market. Berkshire reported that during Q2, it opened new positions worth a total of more than $800 million in S&P 500 stocks Lennar, D.R. Horton and NVR.
Meanwhile, the big picture in the U.S. is that of a long-term housing shortage. The construction of new homes has not kept pace with the growing population. Rising material costs, supply-chain issues and labor shortages since the Covid pandemic have exacerbated the issue.
The shortage is currently running at a deficit of about 5.5 million homes, according to the National Association of Realtors (NAR). The gap is so large it would take more than a decade to close, NAR says, even if new-home construction accelerates.
U.S. Housing Market
Last month, Fannie Mae released its forecast that home sales will total 4.8 million in 2023, the lowest annual sales since 2011. Home sales are expected to remain stunted through 2024, with 4.9 million units expected to sell, according to Fannie Mae economists.
Meanwhile, the 30-year fixed mortgage is hovering near 8%, challenging homebuyers with the highest borrowing costs since the early 2000s.
High mortgage rates have left owners of existing homes mostly holding tight — not wanting to sell and move up into more expensive mortgages. 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 repeatedly raised its target interest rates since the beginning of 2022. Higher interest and mortgage rates tend to reduce housing demand, which theoretically should help dampen inflation. Higher interest rates also help keep the supply of existing homes low.
Warren Buffett: Housing Data
The National Association of Homebuilders delivers its Housing Market Index, a gauge of builder sentiment, on Tuesday. The gauge slipped back to 45 in September, after a four-month run above 50. Economists project a flat reading of 45 for October. Numbers over or under that could move the market.
The Commerce Department announces last month's housing starts data on Wednesday. NAR releases existing-home sales for September on Thursday.
NAR reported that existing-home sales in August retreated 0.7% to a seasonally adjusted annual rate of 4.04 million. Existing-home sales in August fell 15.3% vs. last year. The median existing-home sales price climbed 3.9% compared to a year ago to $407,100.
"Home prices continue to march higher despite lower home sales," NAR Chief Economist Lawrence Yun said in a statement at the time. "Supply needs to essentially double to moderate home price gains."
Meanwhile, housing starts in August came in 11% below July's estimate and 15% down vs. August 2022, according to Commerce Department data.
Building permits — a rough gauge of future activity — in August were at a seasonally adjusted annual rate of 1.54 million, nearly 7% above July's but is 2.7% down compared to last year.
A handful of speeches from Federal Reserve officials, including an Economic Club discussion with Fed Chief Jerome Powell on Thursday, could also have an impact on D.R. Horton and other homebuilder stocks.
The Warren Buffett-DHI stock has a 79 Composite Rating out of 99. D.R. Horton stock also has a 80 Relative Strength Rating. The EPS Rating is 78.
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