5 Stocks to Invest in From the Thriving Homebuilding Industry

The lack of existing homes for sale in the market, along with a desire to own a home, has been driving demand for the U.S. housing space, defying the challenges associated with the high interest rate environment and rising raw material and labor costs. Also, the companies’ focus on cost control, increased operating leverage and important buyouts have been boosting the confidence of the Zacks Building Products - Home Builders industry players. Companies like NVR, Inc. NVR, PulteGroup, Inc. PHM, Toll Brothers Inc. TOL, KB Home KBH and Dream Finders Homes, Inc. DFH have been gaining from their fundamental strength and the above-mentioned tailwinds.

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. Additionally, 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

Lack of Supply: 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, robust employment figures, 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. Despite affordability remaining a key factor in homeownership, the housing market is poised for strength, buoyed by a stable economy and robust demographics. 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.

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, in turn, 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. Again, 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.

Rate Reductions Not Imminent: On Mar 20, 2024, the Fed announced its decision to uphold interest rates in the range of 5.25%-5.5%. This stance has been consistent since August 2023. Despite earlier suggestions by Fed officials of potential rate cuts, they now stress a more cautious approach contingent upon inflation levels. While concerns persist regarding inflation and its impact on borrowing costs, Fed chairman Jerome Powell clarified that the central bank is not currently considering reducing rates. This news is less favorable for the rate-sensitive housing industry, which contributes nearly 3% to the economy.

Affordability Issue & Tight Labor Market: The challenge of home affordability persists due to high mortgage rates. Despite indications from the Federal Reserve suggesting potential rate reductions instead of increases in the near term, homebuyers may continue to face financial constraints throughout the year. Additionally, 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.

Zacks Industry Rank Indicates Bright 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 #49, which places it in the top 19% 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 bright 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.

The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of a higher earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. Since January 2024, the industry’s earnings estimates for 2024 have increased to $11.76 per share from $11.52.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

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 gained 41.3% compared with the broader sector’s rise of 39%. The Zacks S&P 500 Composite has gained 21.9% over this period.

One-Year Price Performance

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 9.9 compared with the S&P 500’s 20.3 and the sector’s 17.

Over the last five years, the industry has traded as high as 11.6X and as low as 4.2X, with a median of 9.1X, as the chart below shows.

Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500

5 Homebuilding Stocks to Bet on

We have selected five stocks from the Zacks homebuilding space that currently carry a Zacks Rank #1 (Strong Buy) and 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Dream Finders Homes: This Jacksonville, FL-based company operates as a holding company for Dream Finders Holdings LLC. It provides single-family entry-level and first-time and second-time move-up homes in Charlotte, Raleigh, Jacksonville, Orlando, Denver, the Washington D.C. metropolitan area, Austin, Dallas and Houston. Its land-light operating model and strategic position in high-growth markets, providing affordable homes to entry-level, first and second-time move-up homebuyers, are tailwinds. Also, the build-for-rent platform provides a consistent home deliveries pipeline, which is less susceptible to temporary changes in demand from individual homebuyers. Despite high interest rate conditions, the company has consistently achieved strong outcomes, showcasing its proficiency in driving sales and effectively executing its growth strategy. The emphasis remains on efficiently managing construction timelines and enhancing inventory turnover.

DFH — a Zacks Rank #1 stock — has gained 132% in the past year. The Zacks Consensus Estimate for its 2024 earnings has been upwardly revised by 9.9% over the past 30 days to $3.45 per share. The estimated figure indicates 23.7% year-over-year growth. The company’s earnings surpassed the Zacks Consensus Estimate in all the trailing four quarters, the average being 144.9%. Again, it carries an impressive VGM Score of A. This helps to identify stocks with the most attractive value, growth and momentum.

Price and Consensus: DFH



Toll Brothers: Based in Horsham, PA, Toll Brothers is a leading builder of luxury homes. The company has been benefiting from its strategy of broadening its product lines, price points and geographies. Also, it has been gaining from the lack of competition in the luxury new home market, its build-to-order approach and solid backlog level. This, combined with its focus on operational efficiency and its policy of boosting its supply of spec homes has been helping TOL to drive growth. Meanwhile, the company has been strategically adding more affordable luxury communities because of the current demographic trends and expanding its footprint and customer base. These communities are expected to be more capital efficient.

Toll Brothers — a Zacks Rank #1 stock — has gained 92.1% in the past year. Earnings estimates for fiscal 2024 have increased to $13.71 per share from $12.82 over the past 60 days. The estimated figure indicates 10.9% year-over-year growth. The company’s earnings surpassed the Zacks Consensus Estimate in all the trailing four quarters, the average being 30.2%.

Price and Consensus: TOL



KB Home: Based in Los Angeles, CA, KB Home is a well-known homebuilder in the United States and one of the largest in the state. Homebuilding operations include building and designing homes that cater to first-time, move-up and active adult homebuyers on acquired or developed lands. The company's growth stems from the Returns-Focused Growth Plan, integrating core business strategy execution, enhanced asset efficiency, and the monetization of substantial deferred tax assets. Furthermore, its Built-to-Order system empowers buyers with extensive choices in crucial aspects of their prospective homes. Leveraging robust land acquisition strategies also contributes significantly to bolstering gross margins and returns.

KB Home — a Zacks Rank #1 stock — has surged 56.3% over the past year. KBH has seen an upward estimate revision of 2.8% for fiscal 2024 earnings, over the past 30 days. The estimated figure indicates 13.9% year-over-year growth. Its earnings topped consensus estimates in all the trailing four quarters, with the average surprise being 26.1%.

Price and Consensus: KBH



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 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 gained 31.1% in the past year. NVR has seen an upward estimate revision for 2024 earnings over the past 30 days by 3.1%. The estimated figure indicates 7.8% year-over-year growth. The company’s earnings surpassed the Zacks Consensus Estimate in all the trailing four quarters, the average being 8.1%. Again, it carries an impressive VGM Score of B.

Price and Consensus: NVR



PulteGroup: Located in Atlanta, GA, this homebuilding company has been capitalizing on a savvy land investment approach, targeting entry-level homebuyers, and delivering increased free cash flow to investors. PulteGroup has consistently seen enhanced volumes, revenues, and profitability thanks to its annual land acquisition strategies. By effectively implementing strategic plans to amplify profitability, particularly in the entry-level housing segment, the company has enjoyed significant gains. Its robust operational framework strategically matches the production of customizable and ready-to-move-in homes with consumer demand, further bolstering its success.

PulteGroup — a Zacks Rank #2 stock — has surged 73.7% in the past year. The Zacks Consensus Estimate for its 2024 earnings has been upwardly revised by 0.2%, over the past 30 days. Its earnings topped consensus estimates in all the trailing four quarters, with the average surprise being 15.1%. Again, it carries an impressive VGM Score of A.

Price and Consensus: PHM

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NVR, Inc. (NVR) : Free Stock Analysis Report

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Dream Finders Homes, Inc. (DFH) : Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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