Lennar, D.R. Horton: Stocks To Play The Booming Housing Market

by Trefis Team
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Our indicative theme of Housing Stocks is up a solid 25% year-to-date, versus 11% for the S&P 500, as the housing market continues to boom, despite surging coronavirus cases. As of Q3, the median price of a single-family home in the U.S. is up 12% from a year ago to $313,500, according to the National Association of Realtors. There are multiple trends driving prices.  Firstly, people are spending more time at home, as they work and learn remotely and this is causing an increase in demand for larger homes and homes in the suburbs. Secondly, the supply of new homes available to buy is also low, likely as the pandemic slowed down construction. More importantly, mortgage rates also remain at around their 50-year lows, with 30-year fixed-rate mortgages rates currently at levels of around 2.8%. [1] The strong housing market should bode well for home builders as well as other companies that have direct exposure to the housing market. Below is a bit more about the companies in our Housing Stocks theme.

Installed Building Products (NYSE: IBP) is a company that installs residential and other complementary building products. The stock is up by 41% this year.

D.R. Horton (NYSE: DHI) is the largest homebuilder in terms of volume in the United States, focusing primarily on more entry-level homes. The stock is up by 39% year-to-date.

Lennar (NYSE:LEN) is one of the largest homebuilders in the U.S. in terms of consolidated revenue. The company focuses on segments including first-time, move-up, and active adult homebuyers (typically aged over 55 years). The stock is up by 36% year-to-date.

PulteGroup (NYSE:PHM), a home construction company based in Atlanta is the 3rd largest home construction company in the U.S. based on the number of homes closed. The stock is up by 11% year-to-date.

KB Home (NYSE:KBH), based in Los Angeles, builds homes primarily for first-time homebuyers. The stock is down -1.6% year-to-date.

[Updated 7/2/2020] Stocks To Play The Housing Recovery

The U.S. housing market has shown signs of recovery despite the coronavirus pandemic, with demand appearing to outstrip supply with inventory remaining tight. Pending home sales – a measure of signed contracts on existing homes – jumped 44% month over month in May and were down just 5% year-over-year per the National Association of Realtors, while the supply of existing homes was nearly 19% lower year-over-year. [1] Sales of newly built homes also rose 13% year-over-year in May. So does the improving demand and tight supply make a case for investing in housing stocks?

While there remain considerable risks – given the uncertain direction of the health crisis and tough unemployment numbers  – we’ve picked 5 stocks with exposure to the housing market  – including D.R. Horton, Lennar, and KB Homes – which could offer upside if the market continues to expand, while providing some level of downside protection if things take a turn for the worse. These companies are reasonably large and well established (market cap over $2 billion), have been seeing steadily expanding demand (consistent 3-year revenue growth) with pricing power also improving (rising operating margins). Moreover, these companies have relatively manageable leverage. See our dashboard analysis 5 Housing Stocks That Could Outperform: DHI, LEN, KHB, PHM, IBP

What’s Driving The Housing Market & What Are The Risks?

While the surge in demand is partly due to pent up demand post the lockdowns of April, lower interest rates have also been a big driver. The 30-year mortgage rate is at multi-year lows, currently standing at roughly 3%, versus about 4.8% in 2018, making it cheaper for people to finance homes. Separately, the trend of working remotely could increase demand for larger homes as people look to upsize. People living in cities and more densely populated areas could also choose to move to the suburbs, driving demand for single-family homes. That said, the longer-term picture is still somewhat fluid. Unemployment is still at multi-year highs with economic growth likely to decline by double-digits in Q2 and daily coronavirus cases have also surged to new highs over the past week meaning that the worst of the health crisis may be far from over. This could make people more circumspect about taking on large, long-term commitments such as buying a new home.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio to beat the market, with over 110% return since 2016, versus about 60% for the S&P 500. Comprising companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

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Notes:
  1. Mortgage Rates, Freddie Mac []
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