Data on household creation (aka formation) from the U.S. Census Bureau shows that since 2000, the number of households in the U.S. has increased significantly—from about 102 million to about 129 million. Much of the growth in recent years stems from various factors, including older millennials getting married and planning families and younger ones getting jobs and finally moving out of their parents’ basements.
Households as a percentage of the working-age population have been rising rapidly since 2017, as rock-bottom mortgage interest rates have spurred home purchases and construction. Though builders profited substantially during this period, they still failed to make a much of a dent in the chronic shortage.
Classic Value Stocks
Many homebuilders are classic value stocks right now, with single-digit P/Es, strong balance sheets and solid profit margins. Actual investors, as opposed to traders, will likely get double-digit returns over the next three years (as opposed to the next three months) from well-chosen homebuilder stocks.
Here are some companies that currently stand out:
• Toll Brothers (TOLL). Most buyers of this company’s main product luxury homes —aren’t worried about higher interest rates. This factor, along with Toll’s current financial condition, scored the company a recent buy rating from Argus. In 2023, this company’s leading position in the luxury segment will enable it to harvest continued high demand from upscale buyers. This stock is selling at bargain-basement prices—down about 28% for the year as of mid-December.
• Taylor Morrison Home Corp. (TMHC). This stock was down about 9% in 2022 as of mid-December, when it was trading at about three and a half times earnings—a substantial improvement in P/E from a few years ago. Though regarded bearishly by analysts, it stands to benefit from being one of the first major homebuilders to venture into the nascent build-to-rent market for single-family homes. Taylor Morrison is planning 55-and-over single-family rental communities, with the usual senior facilities—pickleball courts and swimming pools—to tap demand from seniors weary of the headaches of homeownership.
• Lennar Corp. (LEN)—down nearly 17% for 2022 as of mid-December. Some analysts are down on Lennar, but others see virtue in its market position in a range of categories—“move-up,” luxury and multifamily homes—in strong markets including New Jersey, Maryland, Virginia, Charlotte, Indianapolis, San Diego and parts of Florida. These markets have high demand, good economies and scant inventories. Lennar has unique allure due to zero debt, a financial coat of armor against tough times.
• D.R. Horton (DHI). Though not as debt-free as Lennar, Horton’s debt is pretty low, with a debt-to-equity ratio of 25%. DHI has a strong position in the low-cost home market, with an average selling price $100,000 lower than many of its competitors’—a draw for borderline first- and second-time buyers seeking homes in the 350K-to-400K range. Also, DHI owns nonresidential real estate including ranch land and energy-related property. As of mid-December, the stock was down about 16% for the year.
Even if mortgage rates rise a bit more in 2023, they will still probably be well within historical averages. Even if a recession sets in, well-positioned builders are likely to generate profits through next year and beyond.
Dave Sheaff Gilreath is a founding principal and CIO of Innovative Portfolios, an institutional money management firm, and of Sheaff Brock Investment Advisors, for individual investors. Based in Indianapolis, the firms manage assets totaling about $1.3 billion.