Are These Home Builder Approaching Possible Buy Points?

Key Points

• Home builders have trended higher in the past three months amid conflicting forces at work, given higher interest rates but also high demand for housing in the U.S.
• The National Association of Home Builders/Wells Fargo Housing Market Index showed an uptick in builder confidence for the first time in a year. 
  
• Several stocks in the industry are approaching potential buy points as they continue to form bases or approach moving averages on pullbacks. 

While there’s conflicting economic and business sentiment about the home building industry, companies including D.R. Horton Inc. NYSE: DHI, Lennar Corp. NYSE: LEN, NVR Inc. NYSE: NVR, PulteGroup, Inc. NYSE: PHM, Toll Brothers Inc. NYSE: TOL are showing constructive chart action in recent weeks. 

As a whole, the home builders industry has trended higher in the past three months. Certainly, there are conflicting forces at work, given higher interest rates and the high demand for housing in the U.S. 

In January, the National Association of Home Builders/Wells Fargo Housing Market Index showed that a modest drop in interest rates resulted in an uptick in builder confidence for the first time in a year. 

However, NAHB noted that “builders continue to grapple with elevated construction costs, building material supply chain disruptions, and challenging affordability conditions.”

The press release noted that the low point for builder sentiment appears to have registered in December. Builders have used various incentives, including price reductions, to bolster sales.

Beating Earnings And Revenue Views

Those moves helped boost fundamental growth in 2022, with virtually all the major builders showing double-digit year-over sales and earnings growth in 2021 and 2022. 

For example, D.R. Horton, the largest homebuilder by market capitalization, reported better-than-expected revenue growth when it delivered results for the fiscal first quarter, which ended on December 31. Earnings also beat Wall Street views. 

The stock climbed on the news and has been trending higher north of its 50-day moving, as its chart indicates. 

Investors can easily see overall investor sentiment toward the industry by watching the performance of the SPDR S&P Homebuilders ETF NYSEARCA: XHB. This ETF tracks its namesake index, up 21.51% in the past three months.

Despite ongoing challenges, there’s some optimism about the industry. 

“The rise in builder sentiment also means that cycle lows for permits and starts are likely near, and a rebound for the home building could be underway later in 2023,” NAHB Chairman Jerry Konter said in a statement when the index numbers were released. 

The group’s chief economist Robert Dietz added that lower mortgage rates would result in improved housing affordability. 

That’s good news for builders and potential home buyers, as the NAHB says the U.S. is facing “a structural housing deficit of 1.5 million units.”

Much of the optimism is due to that deficit. Mortgage rates increased slightly in the past week, as Federal Reserve chairman Jay Powell said it’s too early for the central bank to stop increasing the Fed Funds rate. However, industry analysts expect mortgage rates to trend lower throughout 2023.  

Home Builders In Buy Range? 

So are home builders’ stocks buyable right now?

• D.R. Horton is extended from a buy point above $92.45 out of a cup-with-handle base, but a pullback to its 50-day average could offer a new opportunity. The stock closed 6.3% above that line on February 9, so investors could add it to a watch list without acting quickly.

• Lennar is showing much the same type of price action. It cleared a cup-with-handle pattern on January 6, and continues to trade well above its 50-day line. However, this may offer an early buy point as it’s currently finding support at its 21-day average.
• NVR is continuing to etch a cup pattern that began in December 2021. Its current buy point is $5982.45, and it’s currently trading well below that previous high. It’s possible the stock could form a handle in the upper half of its base, but that hasn’t happened yet. 

• PulteGroup is extended from a cup-with-handle buy point above $52.28. The stock gapped up on January 31 following the company’s earnings report. If it pulls back and finds support at its 21-day or 50-day average, that may offer a secondary buy opportunity.

• Toll Brothers appears to be in the process of forming a handle with a potential buy point above $63.19. Even if it clears that base, there’s some risk, as the company reports earnings on February 21 after the close. However, if the stock behaves like fellow home builders and tops views, there may be some strong upside price action after the report.