Housing Market Poised for Rebound as Mortgage Rates Hit 15-Month Low
Falling interest rates and an undervalued homebuilder sector are setting the stage for a resurgence in the housing market, according to Everport ISI head of housing research Stephen Kim.
Kim believes that recent drops in mortgage rates, reaching a 15-month low this week, will fuel a rebound in housing demand. He explained that historically, mortgage rates have anticipated Fed rate cuts, a trend that played out again this year. As rates continue to decline, Kim expects a "very nice fall" with increased demand in the housing market.
Adding fuel to the fire is the ongoing realtor brokerage settlement, which Kim believes will provide a boost to homebuilders. "The builders are incredibly cheap as stocks," he said, noting that even the leading names trade at just 10 times earnings – a valuation that is often associated with struggling companies. "But these are anything but," he emphasized. "They’ve shown incredible resilience, generating significant cash and buying back shares." This resilience, he argues, sets the stage for a significant revaluation of the sector in the coming years.
However, despite a rise in housing inventory, Kim doesn’t see this as a cause for concern. "Having more homes for sale is not a bad thing," he stated, adding that it actually benefits homebuilders. He emphasized that the current inventory level of 3.8 months (compared to a normal level of 6 months) simply means there are more options available for buyers.
When it comes to investing in the housing sector, Kim advises against using ETFs, which he believes don’t provide pure exposure to homebuilders. Instead, he recommends investing in individual stocks, noting that Everport ISI has a "buy" rating on all homebuilders they cover. While he admits it’s difficult to pick favorites, he highlights P/E ratios as a key indicator, pointing to PulteGroup (PHM) as having the highest return potential. He also highlights Toll Brothers (TOL), Lennar (LEN), and Meritage Homes (MTH) as having significant return potential, with projected gains of nearly 40% in the next 12 months.
"We think this group is going to get a significant revaluation over the course of the next few years," Kim concluded, suggesting that the housing market, fueled by attractive mortgage rates and a undervalued homebuilder sector, is entering a period of renewed growth.
Falling Mortgage Rates Spark Optimism for Housing Market, Homebuilders Poised for Growth
Recent declines in mortgage rates have ignited optimism in the housing market, with experts predicting a surge in demand and a favorable outlook for homebuilders. Stephen Kim, Head of Housing Research at Everport ISI, explains that the drop in rates, which has seen the 30-year fixed-rate mortgage hit a 15-month low, has already begun to stir interest from buyers. Kim believes this is a predictable trend, with mortgage rates often anticipating Federal Reserve rate cuts. This dynamic, combined with a rise in available inventory, provides a positive environment for the housing market.
Key Takeaways:
- Mortgage Rates Drive Demand: Falling mortgage rates, reaching a 15-month low, are a key driver of increased buyer interest.
- Anticipation of Rate Cuts: Mortgage rates anticipate Fed rate cuts, creating a favorable environment for the housing market.
- Increased Inventory, Not a Negative: Increased home inventory, while still below normal levels, isn’t a concern for builders, as it provides more options for buyers.
- Homebuilder Stocks: Undervalued and Ready to Rise: Homebuilder stocks are considered undervalued, with analysts predicting significant revaluation in coming years.
- Specific Home Builder Recommendations: Experts recommend investing in individual homebuilder stocks rather than ETFs, highlighting P/E ratio, cash flow generation, and share buybacks as positive indicators for the sector.
Mortgage Rates: A Catalyst for Demand
Kim emphasizes that the recent decline in mortgage rates is a crucial factor in the anticipated resurgence of demand in the housing market. The 30-year fixed-rate mortgage reaching a 15-month low provides a compelling incentive for potential buyers, who are now facing less expensive borrowing costs. This trend is particularly notable given the historical correlation between mortgage rates and Federal Reserve actions.
"By the time the FED actually cuts rates, the mortgage rate has already anticipated it, and certainly that’s happened in our analysis pretty much every single time the FED starts a rate cut cycle and it happened in fact this year too."
Kim predicts that this pre-emptive rate movement will contribute to a robust housing market in the coming months. "I do think that we’re set up for a very nice fall where demand’s going to rebound," he states confidently.
Beyond Rates: A Shot in the Arm for Homebuilders
The positive outlook for the housing market isn’t solely reliant on decreasing mortgage rates. The recent settlement reached between realtor brokerages and the Department of Justice could also inject much-needed impetus into the homebuilding sector. This agreement, which addresses antitrust concerns regarding realtor commissions, could lead to heightened competition and potentially create a more favorable environment for homebuilders.
“I think it could also provide a shot in the arm for the builders,” claims Kim.
Homebuilders: Undervalued and Poised for Growth
Another crucial factor contributing to the positive outlook for homebuilders is their current undervaluation in the market. According to Kim, homebuilder stocks are trading at exceptionally low price-to-earnings ratios (P/E), with even the most established companies barely reaching a 10x multiple.
“You know when I think of a 10 times PE that’s that’s kind of a Pei apply to a busted company you know, and these are anything but.”
This apparent undervaluation, in Kim’s view, represents a significant opportunity for investors. He contends that the strong financial performance of homebuilders over the past year and a half has been somewhat overlooked, as they have demonstrated resilience amid market volatility, generating strong cash flow and actively repurchasing their own shares.
"In fact, that’s actually been what’s been most surprising over the last year and a half when rates have moved so violently and yet the builders have shown that they have been incredibly resilient generating significant cash and buying back shares and so that’s the reason why we think this group is going to get a significant revaluation over the course of for the next few years."
Inventory: A Non-Factor for Homebuilders
A recent increase in available inventory has raised some concerns about the health of the housing market. However, Kim assures that this trend is not a cause for alarm. While inventory levels have risen to 3.8 months, a figure slightly above the normal 6-month level, it remains well below historical averages.
“You know I’d say Morgan there have been things that have worried folks about the housing market as you can imagine as you know over the last two three four years even, and really a lot of them tend to be mischaracterized and I would say this is one of them. The amount of inventory that we’ve seen increase has taken the level of existing home inventory to 3.8 months normal is six. So sure it’s up a little bit, but you know what, you can’t buy what isn’t for sale and so actually having more homes for sale is not a bad thing and it’s surely not bad for the home builders.”
Kim emphasizes that the increase in inventory actually represents a positive development for the housing market, as it provides buyers with more choices and potentially stimulates competition.
Investing in Homebuilders: A Targeted Approach
For investors keen on capitalizing on the anticipated growth of the homebuilder sector, Kim recommends focusing on individual stocks rather than ETFs.
"The ETFs actually don’t do a wonderful job of actually giving you pure home builder plays and so we do recommend that folks just go into the names individually."
Kim suggests considering companies such as PulteGroup (PHM), which he identifies as having the highest return potential. He also highlights Toll Brothers (TOL) and Lennar (LEN), both of which boast significant return potentials over the coming year.
"We have a buy on every home builder that we cover so it’s a little bit hard for me to pick my favorites you know among children you might say. But I will tell you that our our our highest return potential is on PHM and we also have almost 60 something percent and we also have nearly 40% return potentials over the next 12 months for uh Toll Brothers and Lennar and Meritage."
A Bright Outlook for the Housing Market
The confluence of favorable factors, including declining mortgage rates, potential sector-specific benefits from the realtor settlement, and the undervaluation of homebuilder stocks, suggests a positive trajectory for the housing market in the months ahead. While challenges undoubtedly exist, the current market dynamics paint a picture of growth, creating attractive opportunities for investors seeking exposure to the sector.
