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The National Association of Homebuilders noted this week that homebuilder confidence for August rose from the previous month. The metric currently sits at 60 (out of 100), up 2 points from a downwardly revised reading of 58 in July.

This means U.S. homebuilders are becoming more optimistic about sales of single-family homes. This could result in more construction, create more jobs, provide a boost to the economy and be a positive sign for investors in publicly traded homebuilders.


Down From A Year Ago

The good news is tempered somewhat by the reality that current sentiment is lower than it was last year at this time. Although builders are becoming more optimistic, a slowdown in economic growth during the first half of this year reminds builders that some caution is still called for.

In a statement NAHB’s chief economist, Robert Dietz said, “Builder confidence remains solid in the aftermath of weak gross domestic product reports that were offset by positive job growth in July.” According to many homebuilders, some of the unevenness in in the industry springs from the fact strict regulations as well as shortages of land and labor have stifled recovery in home construction.

M&A Is A ‘Thing’

Meanwhile, as The Wall Street Journal reported last month, some of the nation’s largest publicly traded homebuilders are out shopping. Larger players are seeing value in small, privately held companies struggling to find financing.

Among those that have been in acquisition mode over the past couple of years, the country’s third-largest builder, Lennar Corp. (NYSE:LENA), Toll Brothers Inc. (NYSE:TOLC), the nation's largest builder of luxury homes,  D.R. Horton Inc. (NYSE:DHIB), and NVR Inc. (NYSE:NVRC).

Builders In The News

In addition, several publicly traded homebuilders have announced plans that tend to reinforce the overall favorable picture seen by many in the industry.

Leading U.S. builder, KB Home (NYSE:KBHA) recently opened a new private gated community called Vista Pointe community in Jacksonville, Florida. Home prices in Vista Pointe start at about $240,000.

This month Lennar Homes announced plans to build a 226-home development in northeast Longmont, Colorado, a suburb of Denver. Called Provenance, the development is set to open in the first quarter of 2017.


Calling For Cautious Optimism

Morningstar analyst, Brian Bernard says, “Although new-home production has improved each year since the 2009 trough, we have yet to return to a normalized level of production, which has created significant pent-up demand.” That’s the optimism part.

As for caution, Bernard goes on to say, “Homebuilding is a very fragmented and competitive industry with limited barriers preventing competitors from replicating successful strategies and entering new markets. As such, we do not believe any of the homebuilders under our coverage possess economic moats. Still, all of these builders will benefit from growing demand.”

All in all, Bernard D.R. Horton and Toll Brothers are best positioned to capitalize on the growing demand. Horton, due to its large geographic footprint and ability to target multiple demographics, has an advantage others don’t, Bernard says.

Toll Brothers, Bernard believes, is the most undervalued name covered by Morningstar. He does caution that since Toll is a luxury builder and features an average selling price in excess of $800K, he isn’t certain the company will fully participate in the recovery.

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