Will the Surge of Homebuilder Stocks Continue? Wall Street Analysts Remain Optimistic About the Sector.
Homebuilder stocks favored by Warren Buffett have enjoyed a robust rally this year, surpassing even the tech boom powered by AI. Furthermore, analysts remain bullish on the sector's potential for further outperformance, positioning it to deliver market-beating returns.
Homebuilder stocks have experienced a surge of 47% this year, surpassing the $Nasdaq (NDAQ.US)$'s rise of 41%. Companies such as $M/I Homes (MHO.US)$ and $Green Brick Partners (GRBK.US)$ have both seen their stock prices double over the past year. Despite this remarkable performance, these stocks appear to be priced fairly. Currently, the relative strength index (RSI) for a leading group of homebuilders is between 45 and 60, indicating a neutral stance.
Looking forward, Wall Street analysts expect that this sector will continue to deliver solid returns. Target price ratios show an expected potential return of 16% over the next 12 months, outstripping the market and the tech-heavy Nasdaq 100 Index.
The series of economic data released this week has supported expectations of the "soft-landing."
1) Inflation slowing down:
The core PCE for Q2 revised down to 3.7% from the previously reported 3.8%, while consumer spending remains robust despite the slowdown in wage growth. As inflation slows down, the market bets on the Federal Reserve's expectation of an economic soft-landing increase.
2) Employment cooling off：
Falling short of expectations, July's JOLTS data revealed a jobs market that is stabilizing but cooling. The ratio of job openings to unemployed persons in July was 1.51, the lowest since September 2021. In terms of separations, quits decreased to 3.5 million while layoffs and discharges remained relatively unchanged at 1.6 million. This data suggests a more balanced supply and demand in the labor market, and the resulting slowdown in wage growth can help alleviate upward pressure on inflation.
According to the ADP report, private payrolls growth in the US slowed significantly in August to 177,000, falling below economists' expectations of 200,000 surveyed by Dow Jones and well below the revised total of 371,000 added in July. Furthermore, wage and earnings data provided in the ADP release revealed a year-on-year increase of 5.9% for those remaining in their positions and 9.5% for those seeking new roles, both representing the slowest readings in almost two years.
3) Still-solid GDP:
Despite the U.S. economic growth being revised lower due to a sharp downward revision in inventory investment, consumer spending, which constitutes more than two-thirds of U.S. economic activity, experienced a slight upgrade. This quarter, the momentum seems to have picked up with early indications suggesting that consumer spending is being supported by a tight labor market.
"Data point to steady economic momentum into the second half of the year and confirm that a recession isn't on the near-term horizon," said Lydia Boussour, a senior economist at EY-Parthenon in New York.
Michael Rehaut, an analyst at JPMorgan Chase & Co., wrote: "To the extent that interest rates continue to stabilize, absent a medium to large recession, we expect solid book value growth alongside very strong balance sheets over the next two years; Homebuilding stocks should continue to benefit from solid fundamentals."
The continuously rising mortgage rates have increased the cost of homeownership and suppressed housing demand. In response, homebuilders have provided incentives, including rate buy-downs, to alleviate the financial burden caused by the interest rate hike and boost homebuying demand.
A buydown is a mortgage financing technique that allows buyers to secure a lower interest rate for the first few years of the mortgage or even throughout its term. Buydowns can be either permanent or temporary. For example, a 2-1 buydown is a specific type of mortgage buydown that enables homebuyers to save on their interest rates for the first two years of the loan.
Therefore, new homebuyers may not be completely affected as builders offer lower rates through buydowns. The builders are able to do so due to their increased profit margins in recent years and the drop in lumber prices that reduce construction costs. $D.R. Horton (DHI.US)$ and $Lennar Corp (LEN.US)$ are among the builders using this strategy to provide 30-year mortgages with lower rates, as they have reported success according to recent updates from their earnings calls.
Paul Romanowski, executive vice president and chief co-operating officer at D.R. Horton:“We have stayed roughly a point below the market, and we'll have to measure that as we move forward depending on where rates move; We have found it to be one of our most effective incentives, and we have been consistent in that execution.”
Jon Jaffe, co-CEO and president of Lennar:“We can buy down mortgage rates where the resale market can't; So, if we need to accelerate our sales pace, We have that lever at our disposal that we can use.”
The National Association of Realtors reported that pending purchases of previously owned homes in the US have surprisingly increased for the second consecutive month in July. The index of contract signings for purchasing previously owned homes rose by 0.9% to reach 77.6, the highest level in three months.
“The small gain in contract signings shows the potential for further increases,” Lawrence Yun, NAR's chief economist said in a statement.
Source: Investopedia, Market Watch, Bloomberg, CNBC
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
Read more
Comment
Sign in to post a comment
Moomoo News Official Account
Follow the top news of US market!
52KFollowers
7Following
27KVisitors
Follow