Homebuilder Stocks in Focus as Wall Street Anticipates Housing Market’s Next Move

Homebuilder Stocks Jump as Incentives and Price Markdowns Attract Buyers

The housing market has seen an increase in new home sales, and builder cancellation rates have normalized this spring, thanks to incentives and price markdowns. These measures have been proven effective in turning reluctant borrowers into enthusiastic buyers. According to a report from Deutsche Bank, the post-pandemic homebuilding environment is not the post-apocalyptic wasteland that many predicted last fall. There is growing optimism on Wall Street that incentives like mortgage rate buydowns will give homebuilders an edge not just this year but as long as mortgage rates remain elevated.

Limited competition in the housing market

Builders are also facing limited competition, as existing home supply remains tight due to the so-called “lock-in effect.” This means that homeowners would be trading in their 2% or 3% mortgage rates for a 6% or 7% handle if they were to sell and buy something new. Consequently, Deutsche Bank believes that the housing market’s next move is for new construction to be busy while the existing or resale market remains constrained.

Homebuilder Stocks Surge

Deutsche Bank’s optimism in the housing market has translated into a surge among investors who are buying homebuilder stocks. PulteGroup has seen a 55.9% year-to-date jump in its share price, followed by Toll Brothers at 46.9%, D.R. Horton at 25.7%, and Lennar at 24.2%.

Target price outlooks for homebuilders

Deutsche Bank’s report also outlined the target price outlooks for various homebuilders. D.R. Horton has a $150 target price, Meritage has a $200 target price, Pulte has a $95 target price, Tri Pointe has a $42 target price, Toll Brothers has a $94 target price, Taylor Morrison has a $50 target price, KB Home has a $49 target price, and NVR Inc. has a $4,400 target price.

Reducing margins to find the market

During the Pandemic Housing Boom, builders including KB Home, PulteGroup, and NVR achieved huge profit margins by swiftly raising prices in response to seemingly unlimited housing demand. These profit margins gave builders the breathing room to reduce margins, meaning they cut prices and offered aggressive rate buydowns to find the market. According to Deutsche Bank, many builders are offering mortgage rates in the 5.0% to 5.5% range as they pay lenders for so-called “mortgage rate buydowns.”

More room for homebuilder stocks to run

Deutsche Bank also believes that the U.S. housing market is still “under-built” and that there is more room for homebuilder stocks to run. The researchers at Deutsche Bank expect that there will be solid demand for new housing, accompanying a continuing normalization of margins and returns. They also anticipate that as book values grow, stocks should generally move higher, presenting an opportunity for stock selection.

Conclusion

The housing market has seen an increase in new home sales, and builder cancellation rates have normalized this spring, thanks to incentives and price markdowns like mortgage rate buydowns. Deutsche Bank’s report has fueled investor enthusiasm, resulting in a surge in homebuilder stocks. With limited competition and the housing market’s next move in new construction, it is recommended that investors take advantage of the current situation and buy the right mix of homebuilder stocks to maximize returns.