In this article, we discuss 10 housing stocks to watch as price declines continue.
Higher borrowing costs are impacting prospective homebuyers and homeowners around the world. Buyers are pressing pause on home purchases as central banks boost interest rates rapidly, which sent housing prices tumbling. Similarly, people who borrowed with low interest rates during the pandemic now face much higher interest payments as loans have revised. The real estate market has cooled off globally and it is heading for worse times as a global economic slowdown looms ahead. Although the property slump hasn’t reached the level of the 2008 housing crash yet, it depends on whether the Fed manages to tackle inflation without damaging consumer confidence and pushing the US economy in a deep recession.
The Australian and Canadian housing markets are experiencing double-digit house price declines, and economists are of the view that a global downturn in the housing market is just getting started. Hideaki Hirata of Hosei University and a former Bank of Japan economist, told Bloomberg on September 12:
“We will observe a globally synchronized housing market downturn in 2023 and 2024.”
Hirata warned that the full impact of this year’s rampant rate hikes will take time to play out and will be felt for a considerable time by households. “Sellers often overlook signs of shrinking demand”, he added. Higher mortgage financing costs will lead already mortgaged households to limit their spending, while also discouraging prospective buyers from entering the market. This not only affects the housing market but the economy overall. The present slowdown is a drastic change from the housing boom driven by loose monetary policies in the years following the financial crisis and the coronavirus pandemic, which created a flurry of homebuyers and resulted in tightened inventory and skyrocketing prices.
Mortgages are being refinanced all over the world as central banks raise rates, and first-time homeowners are seeing a drastic swing in inflation, without their income matching the rising prices. The latest rate hike by the Fed is only adding to the problems of the housing sector. This has come as quite a shock to millennials who went on a buying spree when the central banks provided easy mortgages right after the pandemic. Some of the housing stocks to watch as price declines continue include Lowe’s Companies, Inc. (NYSE:LOW), Builders FirstSource, Inc. (NYSE:BLDR), and D.R. Horton, Inc. (NYSE:DHI).
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Our Methodology
We picked these housing stocks after a careful assessment of the housing market in 2022, selecting companies that are poised to benefit or lose from the current environment. We have mentioned analyst ratings, business fundamentals, and data from 895 elite hedge funds tracked by Insider Monkey at the end of June 2022 was used to identify the number of hedge funds that hold stakes in each firm.
Top Housing Stocks to Watch as Price Declines Continue
10. Tricon Residential Inc. (NYSE:TCN)
Number of Hedge Fund Holders: 10
Tricon Residential Inc. (NYSE:TCN) is a rental housing company focused on serving the middle-market demographic. The company owns single-family rental homes and multi-family rental units in 21 markets across the United States and Canada. On August 10, Tricon Residential Inc. reported a Q2 FFO of $0.16, exceeding estimates by $0.01, and a revenue of $99.85 million. The revenue gained 21.9% on a year-over-year basis. For 2022, Tricon Residential Inc. is expecting same home revenue growth of 8.0% to 9.5%, versus 7.5% to 9.5% in the earlier guidance.
On September 19, Citi analyst Michael Bilerman upgraded Tricon Residential Inc. to Buy from Neutral with an unchanged price target of $12.50. The analyst expects “solid” internal growth supported by a “sector leading” loss-to-lease and reliance on renewals, which he believes are more robust versus new lease rate growth.
According to Insider Monkey’s data, 10 hedge funds were bullish on Tricon Residential Inc. at the end of the second quarter of 2022, compared to 8 funds in the earlier quarter. The collective stakes in Q2 increased to $58.9 million from $35.7 million in the prior quarter. Israel Englander’s Millennium Management is the biggest stakeholder of the company, with 1.80 million shares valued at $18.3 million. The fund boosted its position in Tricon Residential Inc. by 2241% in Q2 2022.
In addition to Lowe’s Companies, Inc., Builders FirstSource, Inc., and D.R. Horton, Inc., Tricon Residential Inc. is one of the housing stocks to watch as prices continue to decline.
9. Redfin Corporation (NASDAQ:RDFN)
Number of Hedge Fund Holders: 19
Redfin Corporation (NASDAQ:RDFN) is a Washington-based residential real estate brokerage company. The company operates an online real estate marketplace and provides real estate services in the United States and Canada. On September 22, Redfin Corporation expanded its tech-enabled real estate brokerage to buyers and sellers in Hilton Head, South Carolina. Additionally, the company enhanced its listing search feature to include approximately 570 new counties across 15 states. Redfin Corporation is one of the housing stocks to watch as prices continue to decline.
On September 12, DA Davidson analyst Tom White lowered the price target on Redfin Corporation to $9.50 from $13.50 and kept a Neutral rating on the shares. The analyst updated his estimates to factor in the larger headwinds in the U.S. housing market, slashing his FY22 adjusted EBITDA view to ($156.1 million) from ($22.7 million) and his FY23 view to ($49.5 million) from $89.6 million.
Similarly, on September 21, Piper Sandler analyst Thomas Champion noted that U.S. existing home sales declined 17% year-over-year in August with sales of 476,000 units, which represents the second largest year-over-year drop since May 2020. The analyst said inventory remained tight and fell month-over-month to 1.28 million units, but the 30% year-over-year August decline improved compared to a 32% drop in July. The analyst continues to view a weak housing market as a “headwind” for Redfin Corporation, maintaining an Underweight rating on the stock.
According to Insider Monkey’s data, 19 hedge funds were long Redfin Corporation at the end of June 2022, compared to 23 funds in the prior quarter. Brian Bares’ Bares Capital Management is the biggest position holder in the company, with approximately 20 million shares worth $164 million.
Here is what Saga Partners has to say about Redfin Corporation in its Q2 2022 investor letter:
“The Portfolio first bought Redfin in Q2’21. Redfin’s competitive advantage stems from its ability to integrate the demand aggregated from their web portal with full-time salaried agents. Because Redfin agents do not have to prospect for demand, they are more productive than traditional agents, providing Redfin with a lower cost per transaction compared to traditional real estate brokerages. The two other major real estate web portals, Zillow and Realtor.com, have different business models where third party agents advertise on their website. The web portals do not help agents become more productive but simply generate leads and therefore are part of the advertising costs of the traditional real estate value chain.
With barely a year of ownership, we have not really had enough time to evaluate longer-term trends since first buying Redfin, but in our first year, results have come in below what I would expect long-term trends to be. Since COVID, the housing market has been all over the place. It essentially froze during Q2’20, rebounded in H2’20 through 2021, and has since declined in 2022. Home prices have skyrocketed after COVID as housing inventory couldn’t keep up with demand and reached unsustainable levels as measured by historic values to household income levels. As mortgage rates have increased, home prices have barely dropped, causing home affordability and demand to drop. The overall housing market has continued to struggle in the first half of the year. Existing home sales continue to fall, with July declining 19% year-over-year. As a result, Redfin’s real estate transactions fell 4% year-over-year in Q2’22, the first decline (with the exception of Q2’20) since being a public company…” (Click here to see the full text)
8. PulteGroup, Inc. (NYSE:PHM)
Number of Hedge Fund Holders: 19
PulteGroup, Inc. (NYSE:PHM) is a Georgia-based company engaged in the homebuilding business in the United States. It acquires and develops land for residential purposes, and leases, rents, and sells single-family detached, townhomes, condominiums, and duplexes under the Centex, Pulte Homes, Del Webb, DiVosta Homes, American West, and John Wieland Homes, and Neighborhoods brands.
PulteGroup, Inc. on September 20 declared a $0.15 per share quarterly dividend, in line with previous. The dividend is payable on October 4, to shareholders of record on September 22.
On September 19, KeyBanc analyst Kenneth Zener upgraded PulteGroup, Inc. to Overweight from Sector Weight with a $47 price target.
Among the hedge funds tracked by Insider Monkey, 19 funds reported owning stakes worth $517.60 million in PulteGroup, Inc. at the end of June 2022, compared to 27 funds in the prior quarter worth $318 million. Harris Associates is the leading position holder in the company, with 4.8 million shares valued at $191.6 million.
Here is what Miller Value Partners specifically said about PulteGroup, Inc. in its Q2 2022 investor letter:
“Homebuilders and financials, the worst losers during the Financial Crisis crash, plummeted. Some homebuilders, like PulteGroup, Inc., traded down to half their financial crisis lows despite reporting housing improvements for the first time. Fear ruled in the short term, but fundamentals ultimately prevailed. Homebuilders were top performers in 2012 posting triple-digit increases in some cases. Opportunity Equity was a top performer that year.”
7. Toll Brothers, Inc. (NYSE:TOL)
Number of Hedge Fund Holders: 29
Toll Brothers, Inc. (NYSE:TOL) is a Pennsylvania-based company that designs, builds, sells, and arranges finance for a range of detached and attached homes in luxury residential communities in the United States. The company operates in two segments – Traditional Home Building and City Living. On September 20, Toll Brothers, Inc. declared a quarterly per share dividend of $0.20, in line with previous. The dividend is payable on October 21, to shareholders of record as of October 7. The forward yield was 1.84%. It is a significant housing stock to watch as price declines continue.
On September 19, KeyBanc analyst Kenneth Zener upgraded Toll Brothers, Inc. to Sector Weight from Underweight without a price target. On August 29, Raymond James analyst Buck Horne reiterated an Outperform rating on Toll Brothers, Inc. but lowered the price target on the shares to $56 from $75. In Q3 2022, Toll Brothers, Inc. delivered EPS upside, but also a “dramatic” downside with new order growth being down 60% year-over-year, said the analyst. He believes the stock has already priced in a notable recession event despite that “shockingly negative order total through July”. The analyst continues to see “a heavily skewed risk/reward opportunity if this adjustment period proves to be anything less severe than a 2008-style housing crisis”.
According to Insider Monkey’s second quarter database, 29 hedge funds were long Toll Brothers, Inc., with collective stakes worth $625.8 million. Greenhaven Associates is the leading position holder in the company, with 5.3 million shares valued at roughly $239 million.
Here is what Baron Real Estate Fund has to say about Toll Brothers, Inc. in its Q2 2022 investor letter:
“Toll Brothers, Inc. is the leading luxury homebuilder in the U.S. Toll Brothers’ shares corrected more than 41% in the first six months of 2022. Its valuation is only 0.9 times tangible book value versus a long-term average of approximately 1.4 times book value and a peak multiple of approximately 2.0 times book value.”
6. Essex Property Trust, Inc. (NYSE:ESS)
Number of Hedge Fund Holders: 34
Essex Property Trust, Inc. (NYSE:ESS) is a fully integrated real estate investment trust that acquires, develops, and manages multi-family residential properties in selected West Coast markets. On September 15, Essex Property Trust, Inc. declared a $2.20 per share quarterly dividend, in line with previous. The dividend is distributable on October 14, to shareholders of record on September 30. Essex Property Trust, Inc. delivers a dividend yield of 3.66% as of September 26.
On September 19, Citi analyst Michael Bilerman upgraded Essex Property Trust, Inc. to Buy from Neutral with an unchanged price target of $295. The analyst sees three potential catalysts for Essex Property Trust, Inc. – its large exposure to Northern California and Seattle, which he noted have lagged other regions operationally so far and should perform comparatively well in 2023, its “relatively favorable” supply outlook, and a “strong long-term capital allocation track record”.
Among the hedge funds tracked by Insider Monkey, Israel Englander’s Millennium Management is the leading stakeholder of Essex Property Trust, Inc., with 506,231 shares worth $132.3 million. Overall, 34 hedge funds reported owning stakes in Essex Property Trust, Inc. at the end of Q2 2022, up from 26 funds in the earlier quarter.
Like Lowe’s Companies, Inc., Builders FirstSource, Inc., and D.R. Horton, Inc., Essex Property Trust, Inc. is on the radar of smart investors as they monitor the prices in the housing market.
5. CBRE Group, Inc. (NYSE:CBRE)
Number of Hedge Fund Holders: 42
CBRE Group, Inc. (NYSE:CBRE) is a Texas-based commercial real estate services and investment company. The company specializes in property sales and mortgage services, as well as construction management, marketing, and building engineering. On August 23, CBRE Group, Inc.’s board approved a $2 billion increase to its stock repurchase authorization, effective immediately. CBRE Group, Inc. is one of the prominent housing stocks to watch as price declines continue.
UBS analyst Alex Kramm on September 21 lowered the price target on CBRE Group, Inc. to $86 from $95 and maintained a Neutral rating on the shares as part of a broader research note on Real Estate brokers. The analyst noted that macro uncertainty for the group is rising, though he also sees it as being “priced in” by the stocks.
According to Insider Monkey’s data, CBRE Group, Inc. was part of 42 hedge fund portfolios at the end of Q2 2022, compared to 55 funds in the last quarter. Harris Associates is the biggest stakeholder of the company, with 11.5 million shares worth about $845 million.
Here is what Third Avenue Management specifically said about CBRE Group, Inc. in its Q2 2022 investor letter:
“Always ones to favor a company’s prospects for long-term wealth creation over its near-term earnings outlook, Fund Management opted to add to the Fund’s position in the common stock of CBRE Group, Inc. during the quarter. Held in the Fund since 2020, CBRE is the largest commercial real estate services firm globally with a market-leading position in leasing, property sales, facilities management, and valuation. CBRE is also a major player in investment management (with nearly $150 billion of assets under management) and loan servicing (approximately $340 billion of commercial and multi-family loans under administration). In combination, these segments essentially act as a tax on commercial real estate activity and accounted for more than $27 billion in revenues in the 2021 fiscal year.
Fund Management recognizes that the company’s transaction-oriented business lines (e.g., leasing and sales) are likely to retract from more recent levels. Notwithstanding, CBRE’s business model has evolved significantly in recent years with additions in facilities management, investment management, and servicing leading to substantial “recurring” revenue streams. Further, the company has amongst the most “variable” cost structures in the industry, and it is also incredibly well capitalized with a “net-cash” position. As a result, CBRE seems likely to not only remain profitable when viewed on a group-wide basis but also set to take market share through “lift-outs” from competitors and “bolt-on” acquisitions in ancillary activities.
One emerging area of the commercial real estate market that CBRE seems particularly well-suited to capitalize on is the shift to “flexible” office arrangements. More specifically, the company is serving as a key advisor to corporations as they seek to right-size their real estate footprints with an increased focus on “hybrid” working arrangements (CBRE counts 90% of Fortune 100 companies as clients). It is also a principal investor in Industrious—one of the leading flexible workplace solutions globally, with unmistakable advantages relative to a number of its peers. It is therefore Fund Management’s view that this specific opportunity will be a key driver as the company pursues its 2025 earnings target of $8 per share.”
4. D.R. Horton, Inc. (NYSE:DHI)
Number of Hedge Fund Holders: 44
D.R. Horton, Inc. was founded in 1978 and is headquartered in Arlington, Texas. It operates as a homebuilding company in the United States under the D.R. Horton, America’s Builder, Express Homes, Emerald Homes, and Freedom Homes brands. It is one of the top housing stocks to watch as price declines continue.
On August 31, Raymond James analysts Buck Horne and Andrew Cooper added D.R. Horton, Inc. to Raymond James’ “Analyst Current Favorites” list, which contains present favorite stock ideas from the analysts in the firm’s equity research team. On September 19, KeyBanc analyst Kenneth Zener upgraded D.R. Horton, Inc. to Overweight from Sector Weight with an $84 price target.
According to the second quarter database of Insider Monkey, 44 hedge funds held stakes worth $1.92 billion in D.R. Horton, Inc., compared to 52 funds in the prior quarter worth $1.95 billion. John Armitage’s Egerton Capital Limited is the largest stakeholder of the company, with 7.6 million shares valued at $504 million.
Here is what Third Avenue Management specifically said about D.R. Horton, Inc. in its Q2 2022 investor letter:
“D.R. Horton, Inc. is the largest homebuilder in the US by volume (the company sold more than 90k homes in the past year) with a well-recognized focus on delivering quality product at the entry-level price point (its average selling price is less than $400k) and market-leading positions in key Sunbelt markets.
While the near-term outlook for DR Horton remains uncertain given the adjustments occurring in the US residential markets, the medium-to-long-term prospects for volume-based homebuilders with super-strong balance sheets and scale advantages continue to be promising in Fund Management’s view. More specifically, (i) residential inventories remain around record-low levels in most major markets when gauged by aggregate units available (see chart below), (ii) demand for single-family residences seem to have multiple secular drivers as the largest generation in US history (the “millennial cohort”) enters its prime home buying years and desires more space not only due to “life events” but also “remote” and “hybrid” working arrangements, and (iii) significant inflation in rental rates for multi-family units in urban areas has left the rent-toown proposition for single-family homes in suburban areas in a compelling range (particularly in the Sunbelt region which is experiencing outsized job growth and wage growth relative to broader national figures).
In Fund Management’s view, the two industry participants that seem most likely to take part in this shift include DR Horton and Lennar Corp. (a long-held position in the Fund). In conjunction, these two “blue-chip builders” now account for approximately 10% of the Fund’s capital, as well as roughly one out of every five new homes built in the Sunbelt. They would also qualify under Third Avenue Founder Marty Whitman’s “Safe and Cheap” maxim as both companies are nearly “net-cash” (i.e., more cash than debt) with common stocks trading at less than five times trailing earnings, on average.”
3. Lennar Corporation (NYSE:LEN)
Number of Hedge Fund Holders: 47
Lennar Corporation (NYSE:LEN) is a Florida-based homebuilder that operates through Homebuilding East, Homebuilding Central, Homebuilding Texas, Homebuilding West, Financial Services, Multifamily, and Lennar Other segments. It is an important housing stock to watch in the current market backdrop.
BTIG analyst Carl Reichardt on September 23 maintained a Buy rating on Lennar Corporation but lowered the price target on the shares to $92 from $97. The company’s Q3 earnings outperformed expectations, though the management also stressed on adjusting prices and climbing incentives to find a “market clearing price” for homes in production, the analyst told investors. He added that he is lowering his gross margin expectations and trimming his 2022 EPS estimate to $17.57 from $18.09 and 2023 to $12.70 from $15.39, though he continues to favor Lennar Corporation’s transformation to a “faster-turn, deeper market share, more capital-efficient business”.
According to Insider Monkey’s Q2 data, 47 hedge funds were bullish on Lennar Corporation, compared to 50 funds in the preceding quarter. Greenhaven Associates is the leading stakeholder of the company, with 9.3 million shares worth $657.7 million.
2. Lowe’s Companies, Inc. (NYSE:LOW)
Number of Hedge Fund Holders: 53
Lowe’s Companies, Inc. is a North Carolina-based home improvement retailer. On September 1, Atlantic Equities analyst Sam Hudson said the “robust” three-year comp trends at Lowe’s Companies, Inc., despite cautious commentary from several suppliers, indicate the company’s unique and diversified market position. With this demand underpinned by over 40% house price appreciation in two years, the solid long-term trends should prevail, as per the analyst. He acknowledged the short-term recession risk but believes the market is already pricing in more than 18% earnings drop in fiscal 2023 at Lowe’s Companies, Inc.. However, flat or even low-single-digit growth is achievable, contended the analyst. He reaffirmed an Overweight rating on Lowe’s Companies, Inc., citing an attractive risk/reward profile.
According to Insider Monkey’s data, Lowe’s Companies, Inc. was part of 53 hedge fund portfolios at the end of June 2022, compared to 65 funds in the prior quarter. Bill Ackman’s Pershing Square is the largest stakeholder of the company, with 10.20 million shares worth $1.8 billion.
Here is what Pershing Square Holdings specifically said about Lowe’s Companies, Inc. in its Q2 2022 investor letter:
“Lowe’s Companies, Inc.’s is a high-quality business with significant long-term earnings growth potential underpinned by a superb management team that is successfully executing a multi-faceted business transformation.
COVID-19 was a transformational event for the US housing market, causing homeowners to invest significantly in their homes as they shifted nearly all their daily activities to the home environment, including work, school, and leisure. The increased use of the home during COVID, in turn, increased the need for repair, maintenance and remodel activity, which significantly benefited Lowe’s same-store sales. As consumers return to spending more time and money on out-of-the home activities the near-term demand for certain Do-It-Yourself (“DIY”) categories has decreased. Moderation in DIY demand combined with increased mortgage rates and decreased housing affordability has caused many market participants to become concerned that the home improvement industry may give up a significant part of their COVID pandemic sales gains.
While we expect that there will be some near-term volatility and continued moderation of DIY demand, growth remains strong for projects requiring professional installation (the “Pro” business) due to a substantial backlog of projects undertaken during COVID, which should support industry growth in the near-term. In addition, we believe the medium[1]term growth outlook for the home improvement industry remains strong as demand is likely to normalize at a materially higher level as compared to the pre-COVID era. For the decade prior to COVID, home improvement industry sales were notably depressed relative to their long-term averages as a percentage of overall consumer spend and GDP and have only now returned to their longer-term historical levels. Moreover, we believe COVID has permanently renewed consumers’ focus, appreciation, and utilization of their homes, which combined with higher home equity values, strong consumer balance sheets, low levels of home inventory for sale and an aging housing stock that requires an increasing level of maintenance, will likely result in a structurally higher level of ongoing home industry spending in the future. In the most recent quarter demand strengthened throughout the quarter as DIY consumers returned from summer vacations and focused on less seasonal home improvement projects…” (Click here to read the full text)
1. Builders FirstSource, Inc. (NYSE:BLDR)
Number of Hedge Fund Holders: 53
Builders FirstSource, Inc. is a Texas-based manufacturer and supplier of building materials, engineered components, and construction services to professional homebuilders, sub-contractors, remodelers, and consumers in the United States. Builders FirstSource, Inc. is one of the most prominent housing stocks to monitor as price declines continue.
In early August, the company posted strong Q2 2022 results and updated guidance for the year. Builders FirstSource, Inc. sees 2022 adjusted EBITDA margin growing by 120 to 160 basis points, compared to 90 to 110 bps in the previous target. Similarly, free cash flow for 2022 is expected to be $2.5 billion-$3 billion, versus $2 billion-$2.4 billion in the prior guidance. On August 17, Deutsche Bank analyst Joseph Ahlersmeyer initiated coverage of Builders FirstSource, Inc. with a Buy rating and a $93 price target.
Among the hedge funds tracked by Insider Monkey, 53 funds were bullish on Builders FirstSource, Inc. at the end of June 2022, compared to 57 funds in the previous quarter. Coliseum Capital is the biggest position holder in the company, with 6.46 million shares worth $347 million.
Black Bear Value Partners mentioned the company in its Q1 2022 investor letter. Here is what the fund said:
“Builders FirstSource is a supplier and manufacturer of building materials for professional homebuilders, subcontractors, remodelers, and consumers. Their products include factory-built roof and floor trusses, wall panels and stairs, vinyl windows and custom millwork.
The fundamental discussion about homebuilders applies to BLDR. As more homes are built across the country, there will be an increased need for scaled sourcing of products to homebuilders. There is a large amount of fragmentation in the supply chain which provides BLDR a long runway for acquisitions and realistic synergies.
The management team has been using their prodigious free cash flow to both acquire new businesses and buy in their stock. While I historically always liked their business, their historic high-debt levels gave me pause. They have right sized their balance sheet and are taking a very thoughtful view on capital allocation on behalf of shareholders.
BLDR should be able to generate $7-$10 a share in cash in the medium term with significant upside if they can scale through acquisition and/or further penetrate existing markets. We own it at a 11-15% free-cash flow yield so little growth is needed for us to compound value at high rates.”
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