5 Homebuilding Stocks to Watch Amid Rate-Hike & Inflation Woes


Indeed, the U.S. housing space continues to grapple with accelerating mortgage rates, rising raw material and labor costs. Disruption in the supply chain has been impacting builders’ ability to deliver on time. That said, the rising need for more work-at-home space, lack of existing homes for sale, focus on cost control, increased operating leverage and important buyouts have been somewhat aiding the Zacks Building Products – Home Builders industry. Companies like Taylor Morrison Home Corporation TMHC, Century Communities, Inc. CCS, Dream Finders Homes, Inc. DFH, M/I Homes, Inc. MHO and Beazer Homes USA, Inc. BZH have been gaining from their fundamental strength and above-mentioned tailwinds.

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.

4 Trends Shaping the Homebuilding Industry’s Future

Supply Chain Hurdles & Tight Labor Market: 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. 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 for August 2022 compared with the year-ago period. With COVID-related lockdowns continuing in China and Europe facing severe energy crises, supply chain disruptions are likely to persist in the near term as well. Again, the shortage of skilled labor continues to be a pressing concern.

Higher Rates: While supply-chain challenges are expected to continue to impact the level of housing starts and construction cycle times, the home affordability issue remains a headwind owing to accelerating home prices and mortgage rates this year. While remaining committed to combating inflation, the Fed has raised rates four times since March this year, with a 75-basis-point increment at each of its last two meetings. Per Fed officials’ latest hawkish comments, the central bank of the United States is likely to raise the benchmark rate by 75 basis points in September 2022 in order to more effectively address persistent inflation. This is less encouraging for this rate-sensitive market, which accounts for almost 3% of the economy. Rising borrowing costs and elevated risk of recession have been driving the single-family homebuilding market into recession.

Suburban Shift: The changing geography of housing demand has been supporting builder confidence to some extent. Demand for new homes in lower-density markets, including small metro areas, rural markets and large metro exurbs is a tailwind 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 favor the U.S. housing market in the near term.

Cost-Control Efforts, Focus on Entry-Level Buyers & Acquisitions: Given the accelerated raw material prices, 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, resulting in improved volumes, market share, revenues as well as profitability.

Zacks Industry Rank Indicates Dull 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 #237, which places it in the bottom 5% 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 bleak 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 bottom 50% of the Zacks-ranked industries is a result of bleak earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since June 2022, the industry’s earnings estimates for 2022 have decreased approximately 1.8%.

Despite the industry’s blurred near-term view, we will present a few stocks that one may consider adding to their portfolio. 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 lost 26.1% compared with the S&P 500’s decline of 13.4% and the broader sector’s 18.5% decline.

One-Year Price Performance

Industry’s Current Valuation

On the basis of the forward 12-month price-to-earnings ratio, which is commonly used for valuing homebuilding stocks, the industry is currently trading at 4.7 compared with the S&P 500’s 16.9 and the sector’s 11.

Over the last five years, the industry has traded as high as 14.4X and as low as 4.2X, with a median of 9X, as the chart below shows.

Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500

5 Homebuilding Stocks to Watch For Now

We have selected five stocks from the Zacks homebuilding space that currently carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Taylor Morrison Home: This Scottsdale, AZ-based homebuilder’s ongoing operational enhancements, acquisition synergies and robust pricing power have been more than offsetting the inflationary pressure and delay in some closings.

TMHC shares have dropped 33.3% over the past year. Nonetheless, the Zacks Consensus Estimate for its 2022 earnings has been upwardly revised by 6.6% over the past 30 days. Earnings for 2022 are expected to grow 87.8%.

Price and Consensus: TMHC


Dream Finders Homes: This Jacksonville, FL-based company operates as a holding company for Dream Finders Holdings LLC.  It provides single-family entry-level, and first-time and second time move-up homes in Charlotte, Raleigh, Jacksonville, Orlando, Denver, the Washington D.C. metropolitan area, Austin, Dallas and Houston. The second-quarter 2022 marks the company’s sixth quarter as a public company. Its land-light operating model and strategic position in high-growth markets, providing affordable homes to the entry-level, first and second-time move-up homebuyers, are tailwinds. Also, the build-for-rent platform provides a consistent home deliveries pipeline, which is less susceptible to temporary changes in demand from individual homebuyers.

DFH has slipped 40.8% over the past year. Nonetheless, the Zacks Consensus Estimate for its 2022 earnings has been upwardly revised by 6.3% over the past 30 days. Earnings for 2022 are expected to grow 100%.

Price and Consensus: DFH

M/I Homes: This Columbus, OH-based builder of single-family homes has been gaining from a high level of performance across all its housing operations and the Mortgage and Title business. Greater operating leverage, a stellar backlog level and a higher return on equity have been helping the company to generate improved profits. MHO remains optimistic about navigating the ongoing challenges, given its balance sheet strength, low debt levels, record backlog sales value, diverse product offerings and well-located communities.

MHO has plunged 38% over the past year. Nonetheless, the Zacks Consensus Estimate for its 2022 earnings has been revised upwardly by 2.1% over the past 60 days. Earnings for 2022 are expected to grow 23.9%.

Price and Consensus: MHO

Beazer Homes:  This Atlanta, GA-based homebuilder designs, builds and sells single-family homes. BZH designs homes to appeal primarily to entry-level and first move-up homebuyers. BZH’s subsidiary, Beazer Mortgage, originates the mortgages for the company’s homebuyers. The company’s Balanced Growth strategy, higher pricing, lower sales incentives and a solid backlog level are expected to improve profitability.

BZH has an expected earnings growth rate of 59.3% for fiscal 2022. Although its shares have declined 47.8% over the past year, BZH has seen an upward estimate revision of 7% for fiscal 2022 earnings over the past 30 days. This depicts analysts’ optimism about the company’s prospects.

Price and Consensus: BZH

Century Communities: This Greenwood Village, CO-based company engages in the design, development, construction, marketing, and sale of single-family attached and detached homes. Demand for its affordable new homes, driven by favorable demographics and tight resale supply, while underscoring the strength of its competitive positioning and national footprint across 45 high-growth markets, have been driving Century Communities’ growth.

CCS has slipped 47.4% over the past year. Nonetheless, the Zacks Consensus Estimate for its 2022 earnings has been upwardly revised by 1.3% over the past 60 days. Earnings for 2022 are expected to grow 31.7%.

Price and Consensus: CCS

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