By Philip van Doorn, MarketWatch
Those actions helped lead to a decline in mortgage rates, which seems to be providing a bounce for the homeuilders. Here’s how the national average rate for 30-year mortgage loans has fluctuated over the past year, according to Freddie Mac data:
So 30-year mortgage loan rates are even lower than they were a year ago.
Home construction permit volume “started having pretty ugly numbers in November and December, and rebounded in January. What you see now is sentiment going from macro recession, with [construction] starts down meaningfully, to the sentiment that we will have moderate growth in 2019, Lacayo said.
U.S. housing starts were up a seasonally adjusted 18.6% in January from a year earlier, while permit volume increased 1.4%.
“Tangible book value tends to be a reliable floor” for homebuilder stocks, Lacayo said. “The only time they broke book value [as a group] was in 2008.”
For home builders, book value is generally the value of “inventory,” or the land the company has purchased to build on, Lacayo explained. Tangible book value subtracts goodwill, which is a noncash item that represents the premium paid if a builder acquires a competitor.
Looking at most of the stocks’ valuations, it would appear that late last year investors were expecting a 2008-like residential real-estate crisis. Even now, valuations are much lower than they were at the end of 2017.
|Price/ tangible book value|
|Home builder||Ticker||March 14, 2019||Dec. 31, 2018||Dec. 31, 2017|
|William Lyon Homes Class A||0.8||0.5||1.6|
|M/I Homes Inc.||/zigman2/quotes/200736509/composite MHO||0.9||0.7||1.3|
|TRI Pointe Group Inc.||/zigman2/quotes/204302452/composite TPH||1.0||0.8||1.5|
|Meritage Homes Corp.||/zigman2/quotes/209069331/composite MTH||1.0||0.8||1.3|
|KB Home||/zigman2/quotes/206220859/composite KBH||1.0||0.9||1.4|
|Toll Brothers Inc.||/zigman2/quotes/201912487/composite TOL||1.1||1.0||1.6|
|M.D.C. Holdings Inc.||/zigman2/quotes/203145113/composite MDC||1.1||1.0||1.3|
|Lennar Corp. Class A||/zigman2/quotes/202536373/composite LEN||1.4||1.3||2.0|
|PulteGroup Inc.||/zigman2/quotes/201694804/composite PHM||1.6||1.5||2.4|
|D.R. Horton Inc.||/zigman2/quotes/202032328/composite DHI||1.7||1.4||2.5|
|LGI Homes Inc.||/zigman2/quotes/202461766/composite LGIH||2.0||1.6||3.4|
|Cavco Industries Inc.||/zigman2/quotes/206244792/composite CVCO||2.6||2.8||3.9|
|NVR Inc.||/zigman2/quotes/209548385/composite NVR||5.5||5.0||8.3|
Annual home price appreciation “has been 5% to 6% the past five years. Now you see it moderating at 4%,” Lacayo. He called this level sustainable, because of improved affordability indicated by the extraordinary improvement in U.S. wage growth to 3.4%.
Lacayo publishes research on building-products companies, home-improvement retailers and home builders. He has a neutral rating on TRI Pointe Group /zigman2/quotes/204302452/composite TPH -4.07% , which is on the above list. He has “buy” ratings on Home Depot /zigman2/quotes/208081807/composite HD -0.10% and Lowe’s /zigman2/quotes/205563664/composite LOW -0.45% .
When asked which of the homebuilder stocks listed here he favors, he named Lennar /zigman2/quotes/202536373/composite LEN -2.16% , although he doesn’t publish research on this company. “They are coming off their acquisition of CalAtlantc last year. This allows them to capture synergies, which should support their overall profits. This also gives them a larger market share in major metro areas. You also have a best-in-class management team,” he said.
Here’s a summary of sell-side analyst opinion about all 13 home builders, sorted by percentage of “buy”or equivalent ratings:
|Home builder||Ticker||Share 'buy' ratings||share 'hold' ratings||Share 'sell' ratings||Closing price - March 14||Consensus price target||Implied 12-month upside potential|
|Lennar Corp. Class A||/zigman2/quotes/202536373/composite LEN||86%||14%||0%||$48.02||$56.61||18%|
|LGI Homes Inc.||/zigman2/quotes/202461766/composite LGIH||67%||33%||0%||$57.70||$63.40||10%|
|D.R. Horton Inc.||/zigman2/quotes/202032328/composite DHI||57%||43%||0%||$40.80||$43.94||8%|
|Cavco Industries Inc.||/zigman2/quotes/206244792/composite CVCO||50%||50%||0%||$121.16||$166.50||37%|
|TRI Pointe Group Inc.||/zigman2/quotes/204302452/composite TPH||27%||64%||9%||$12.85||$13.67||6%|
|M.D.C. Holdings Inc.||/zigman2/quotes/203145113/composite MDC||27%||64%||9%||$28.47||$30.68||8%|
|Meritage Homes Corp.||/zigman2/quotes/209069331/composite MTH||25%||58%||17%||$43.39||$46.11||6%|
|William Lyon Homes Class A||25%||75%||0%||$15.13||$15.67||4%|
|Toll Brothers Inc.||/zigman2/quotes/201912487/composite TOL||24%||67%||9%||$36.15||$38.07||5%|
|PulteGroup Inc.||/zigman2/quotes/201694804/composite PHM||16%||58%||26%||$27.09||$26.40||-3%|
|KB Home||/zigman2/quotes/206220859/composite KBH||15%||65%||20%||$23.65||$23.28||-2%|
|NVR Inc.||/zigman2/quotes/209548385/composite NVR||14%||86%||0%||$2,722.77||$2,661.25||-2%|
|M/I Homes Inc.||/zigman2/quotes/200736509/composite MHO||0%||100%||0%||$26.20||$29.00||11%|
As always, if you see any companies listed here that interest you, it’s important to do your own research and form your own opinion about whether now is the time to buy the stock.
<STRONG>Create an email alert for Philip van Doorn’s Deep Dive columns <INTERNAL-PAGE URL="/tools/alerts/newsColumn.asp">here.</INTERNAL-PAGE></STRONG>