Indeed, the U.S. housing space continues to grapple with the rising raw material and labor costs. Also, disruption in the supply chain arising from the novel coronavirus outbreak may impact builders’ ability to deliver on time. That said, the rising need for more work-at-home space has been aiding the Zacks Building Products - Home Builders industry. Also, companies like D.R. Horton, Inc. (DHI Quick QuoteDHI - Free Report) , Lennar Corporation (LEN Quick QuoteLEN - Free Report) , Toll Brothers Inc. (TOL Quick QuoteTOL - Free Report) , PulteGroup, Inc. (PHM Quick QuotePHM - Free Report) and KB Home (KBH Quick QuoteKBH - Free Report) have been gaining from higher demand, focus on cost control, increased operating leverage, and important buyouts.
Industry Description
The Zacks Building Products - Home Builders industry comprises manufacturers of residential and commercial buildings. Some of the 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.
3 Trends Shaping the Homebuilding Industry's Future
Suburban Shift: The changing geography of housing demand has been supporting builder confidence. Demand for new homes is improving in lower-density markets, including small metro areas, rural markets and large metro exurbs, as people seek larger homes to work from home amid the pandemic. The desire for more space and amenities to accommodate working and learning from home should continue to boost the U.S. housing market in the near term.
Cost-Control Efforts, Focus on Entry-Level Buyers & Acquisitions: Given the accelerated raw material prices, the 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.
Also, the majority of companies are focused on growing the demand for entry-level homes and addressing the need for lower-priced homes, given affordability concerns prevailing in the U.S. housing market. Meanwhile, industry players have been acquiring other homebuilding companies in desirable markets, in turn resulting in improved volumes, market share, revenues as well as profitability.
Supply Chain Hurdles, Tight Labor Market & Expected Higher Rates:
Continuous supply-chain issues arising from the COVID-19 outbreak and response to the health crisis in various countries have been impacting builders’ ability to deliver on time. Also, rising material costs are quite challenging. According to an Associated Builders and Contractors' latest analysis of information provided by the U.S. Bureau of Labor Statistics, there has been upward pressure on construction input prices in recent weeks. Again, the shortage of skilled labor continues to be a pressing concern. Homebuilders remain cautiously optimistic about the industry’s prospects owing to the rising input and labor costs.
Although the U.S. housing market remains buoyant, defying low inventory levels and broad-based economic as well as public health risks, higher mortgage rates expectation in the near term may mar its prospects. It is to be noted that the Federal Reserve expects to raise interest rates three times in 2022 as it exits from the policies enacted at the start of the health crisis. Interest rate hikes, soaring inflation and a smaller bond-buying program are pointing to higher mortgage rates in 2022. This may prove less encouraging for this rate-sensitive market, which accounts for almost 3% of the economy.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Building Products - Home Builders industry is a 19-stock group within the broader Zacks Construction sector. The industry currently carries a Zacks Industry Rank #40, which places it at the top 16% 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 upbeat 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 positive 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 December 2021, the industry’s earnings estimates for 2022 have increased approximately 7.4%.
Given solid near-term prospects, we will present a few stocks that have the potential to outperform the market. But before that, it’s worth taking a look at the industry’s shareholder returns and current valuation.
Industry Lags Sector and S&P 500
The Zacks Building Products - Home Builders industry has lagged the S&P 500 Index and broader Zacks Construction sector in the past year.
Over this period, the industry has gained 7.4% compared with the S&P 500’s rise of 18.5% and the broader sector’s 9.9% rally.
