Why Investors are Suddenly Bullish on Homebuilder Stocks

Homebuilder stocks all jumped as investors have been greeted with bullish news this week on the growing strength in new housing. A series of positive economic reports indicated that there were increases in both Housing Starts and Building Permits in February.

Housing Starts measure new residential homes that have begun construction, while Building Permits represent the number of approvals issued for future home construction. A decline in mortgage rates since last fall is also contributing to the increase in new home demand, as buyers are now more inclined to take action.

Among the stocks heating up is Lennar (NYSE:LEN), this new home builder constructs residential dwellings throughout the United States. Its stock price has climbed 4.10% since Tuesday’s open in reaction to the growing business prospects.

Rising Builder Sentiment

Builder sentiment in the market for newly constructed single-family homes surged above economists’ forecasts. The National Association of Home Builders (NAHB) monthly survey, known for tracking Builder Sentiment, reported a reading of 51 in the March survey. This figure, surpassing the pivotal 50 mark, signifies bullish sentiment in the housing market. The recent surge in confidence to 51 exceeded economists’ projections of 48. This positive trend has prompted investors to turn their attention towards homebuilder stocks as potential opportunities for growth.

The aforementioned breakeven reading is the most robust level Builder Sentiment has reached in eight months, buoyed by a decline in mortgage rates that has enticed new buyers into action. Moreover, a scarcity of existing homes for sale has steered buyers towards contemplating new home construction as a viable option

Housing Starts Gain Momentum

Secondly, Housing Starts numbers have been beating economists’ forecasts over the past few months as they continue to show home construction is heating up. New Starts, where ground has been broken, rose to 1.52 million last month (annual/seasonally adjusted). This is a whopping 10.7% spike compared to January. New Permits, the part of the report showing approved projects, were higher by 1.9% (seasonally adjusted). This means the pipeline for new construction is likely to continue at an accelerated pace. And, stocks of homebuilders should continue to be in the spotlight.   

Moreover, as with Homebuilder Sentiment, Housing Starts also significantly beat economist forecasts. Initial projections anticipated Starts to increase to 1.45 million and Permits to 1.5 million. The substantial deviation of the actual economic data from these forecasts is prompting stock prices to naturally veer upwards.

Declining Mortgage Rates

It is important to note that in a housing market showing signs of growth, lower interest rates are advantageous for the entire housing industry. Across the U.S., convincing potential sellers to let go of their low-interest-rate mortgages obtained during the pandemic and sell their homes has been challenging. This phenomenon, known as the “lock-in effect,” has largely made little financial sense for most homeowners. The positive development for the housing sector is that this effect is now diminishing, given the decline in mortgage rates.

This week, the Federal Home Financing Association (FHFA) published a study titled “The Lock-In Effect of Rising Mortgage Rates.” The study reveals that when current mortgage rates surpass a homeowner’s rate, the likelihood of selling decreases by 18% for each one percentage point rate increase. Following a peak in mortgage rates around 8% in fall 2023, rates have now dropped below 7%. This shift likely means more homeowners are now willing to sell, leading to potential growth in home sales and boosted performance for stocks linked to new home builders.

What Homebuilder Stocks Are Investors Buying?

Some of the top homebuilder stocks that react to renewed construction and improving expectations include Lennar Corporation (NYSE:LEN), D.R. Horton (NYSE:DHI), PulteGroup (NYSE:PHM), Toll Brothers (NYSE:TOL), and NVR Inc. (NYSE:NVR).  The yearly gains for each of these stocks have far exceeded the overall market. A quick scan using the TipRanks Comparison Tool shows a Moderate Buy recommendation for each of the companies.

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