Home builders stumbled in June on fear rising mortgage rates will derail demand. But, demand may not suffer as much as feared. If so, a more stable recovery and a longer runway for housing profits may be ahead.
That stability and profit potential may make it a good time buy shares in D.R. Horton, Inc. (NYSE:DHI), Lennar Corporation (NYSE:LEN) and Toll Brothers Inc (NYSE:TOL) for three reasons: strong sales and backlog support future revenue and profits; mortgage rates remain historically below average; and price-to-book values have retreated from their peaks.
New home construction remains strong
The number of new one-family homes sold in the U.S. in May totaled 476,000. That’s a solid increase from the 458,000 sold in January and well above last May’s 369,000. And, there’s more room to run since the median monthly new one-family homes sold since 1963 is 637,000.
Importantly, the pipeline for new home sales remains quite strong with 690,000 new homes completed in May. Those completions will show up in quarterly earnings this quarter. Increasingly, those completions are being sold for higher price tags too. The absence of inventory — there are only 4.1 months of new home inventory — helped median new home prices climb to $264,000 in May from $239,000 a year ago.
If you consider home building backlogs, the outlook for future sales and profit growth remains solid.
The number of new homes and the total value of those homes in D.R. Horton, Inc. (NYSE:DHI) and Lennar Corporation (NYSE:LEN)’s backlog are up roughly 55% and 76%, respectively, in the past year through last quarter. Backlog grew 52% and backlog dollar value expanded 69% at Toll Brothers Inc (NYSE:TOL).
Rates remain historically low
The main reason for selling builders stems from fear higher rates will push new home buyers to the sidelines. But, while some may delay purchases hoping for a return of low rates, others will jump in fearing rates will run higher. The net affect may simply smooth housing demand over time rather than curtail it.
Consider, the average 30 year mortgage rate is roughly 4.5%. This is still well below the median rate of 8.1% since 1971 and the 6.3% median rate from 2000 through 2007. This suggests rates would have to run much higher than they are currently to sink housing demand.