Much has been written about potential home buyers feeling discouraged — discouraged by rising home prices, by rising mortgage rates and by supply shortages.
But homebuilders aren’t feeling so hot about the housing market either.
“Rapidly rising interest rates combined with ongoing home price increases and higher construction costs continue to take a toll on builder confidence and housing affordability,” the National Association of Home Builders said in a statement.
The NAHB/Wells Fargo Housing Market Index of homebuilder confidence fell to a seven-month low in April.
“The housing market faces an inflection point, as an unexpectedly quick rise in interest rates, rising home prices and escalating material costs have significantly decreased housing affordability conditions, particularly in the crucial entry-level market,” said NAHB Chief Economist Robert Dietz.
Home prices soared 19.2% in the 12 months through January, according to the S&P CoreLogic Case-Shiller Index.
Meanwhile, the 30-year fixed-rate mortgage averaged 5% in the week ended April 14, the highest since Feb. 11, 2011, according to mortgage agency Freddie Mac.
“As Americans contend with historically high inflation, the combination of rising mortgage rates, elevated home prices and tight inventory are making the pursuit of homeownership the most expensive in a generation,” Sam Khater, Freddie Mac’s chief economist, said in a statement.
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As for homebuilder stocks, Morningstar analyst Brian Bernard is bullish on D.R. Horton (DHI) – Get D.R. Horton, Inc. Report, the nation’s biggest homebuilder by volume. He puts fair value at $113 for the stock, compared to a recent quote of $71.01.
The company has “an extensive geographic footprint, wide product breadth, value focus, and financial flexibility,” he wrote in a February commentary. “Management is focused on continuing to expand the business while generating sustainable returns on invested capital and positive cash flows throughout the housing cycle.”
Bernard is impressed with D.R. Horton’s Express Homes entry-level product, launched in 2014. “This bet has paid off thus far,” he said. “Although competing products have entered the market, we believe D.R. Horton has a first-mover advantage that will boost its growth over the coming years.”
Bernard is also bullish on luxury home builder Toll Brothers (TOL) – Get Toll Brothers, Inc. Report. He puts fair value at $70, compared to a recent quote of $45.45.
“Toll Brothers prides itself on controlling an ample supply of some of the best land in the industry,” he wrote in a February commentary. “Premier land inventory, combined with luxurious, customizable designs, allows the company to charge industry-leading average selling prices (among public peers).”
Bernard lists three factors that should boost demand for Toll Brothers’ homes.
· “Strong demand for entry-level homes should encourage established homeowners to sell their first homes in favor of new move-up homes;
· “The popularity of empty-nester homes and active-adult communities is increasing among baby boomers; and
· “Growing household wealth should put the company’s ‘affordable luxury’ products in reach of younger households.”