The “wealth effect" is an economic theory that suggests people will spend more when they feel the value of their assets are rising. While this is often linked to the value of stocks people own, it's also tied to home prices.
With that in mind, homeowners have been feeling bullish about the value of their homes since 2020. Housing prices have soared to record high levels. And even in an environment of high inflation and rising interest rates, high demand continues to be the driving factor for home prices.
That's why it's still a good time to consider investing in housing stocks. These stocks encompass a range of companies, including homebuilders, home furnishing companies, home improvement companies, and adjacent industries like lumber and other construction-related stocks.
The focus of this presentation is on seven housing stocks that continue to show strength in a challenging environment. In addition to looking at several homebuilders, this presentation looks at several companies that have businesses that are adjacent to the homebuilding market, but still look to provide investors with solid gains in 2023 and beyond.
Quick Links
- D.R. Horton
- PulteGroup
- LGI Homes
- Airbnb
- Lowe’s
- CareTrust REIT
- SPDR S&P Homebuilders ETF
#1 - D.R. Horton (NYSE:DHI)
If you’re questioning the outlook for housing stocks, you may want to consider that Warren Buffett doesn’t seem to share those concerns. Buffett’s hedge fund, Berkshire Hathaway, Inc. (NYSE: BRK.B) just bought shares of some homebuilder stocks, and its largest purchase was D.R. Horton, Inc. (NYSE: DHI) stock. Berskshire purchased approximately 6 million shares of DHI stock valued at about $726.5 million.
D.R. Horton is one of the largest homebuilders and builds a variety of housing types including townhouses, duplexes, and triplexes. The company is also taking steps to ensure they can turn homes faster and reduce inventory levels in a housing market where demand continues to outpace supply.
Analysts are forecasting earnings growth of approximately 6.5% in the next 12 months with a 17% upside in the company’s stock price. DHI stock also has an attractive valuation at just 8.7x forward earnings.
About D.R. Horton
D.R. Horton, Inc operates as a homebuilding company in East, North, Southeast, South Central, Southwest, and Northwest regions in the United States. It engages in the acquisition and development of land; and construction and sale of residential homes in 118 markets across 33 states under the names of D.R.
Read More - Current Price
- $139.61
- Consensus Rating
- Hold
- Ratings Breakdown
- 7 Buy Ratings, 7 Hold Ratings, 2 Sell Ratings.
- Consensus Price Target
- $179.60 (28.6% Upside)
#2 - PulteGroup (NYSE:PHM)
Next up is PulteGroup Inc. (NYSE: PHM). The homebuilder’s portfolio is diversified in many of the fastest-growing U.S. markets with a healthy concentration in Florida which continues to see population growth.
That growth continues to show up in the company’s earnings. In the second quarter of 2023, the homebuilder posted earnings of $3.21 which was higher than the $2.73 it recorded in the same quarter of 2022. The top line was equally strong with the company posting $4.1 billion, an 8% YOY increase. The company also reported a backlog of 13,558 homes valued at $8.2 billion.
Although Pulte Group is only expected to show modest earnings growth in the next 12 months, analysts are forecasting an 11.2% upside in the price target for PHM stock, which currently trades at a forward price-to-earnings (P/E) ratio of just 6x earnings.
The company also pays a dividend that, while having a modest 0.83% yield has been increasing for five consecutive years. The company is also adding shareholder value via a series of share repurchases.
About PulteGroup
PulteGroup, Inc, through its subsidiaries, primarily engages in the homebuilding business in the United States. It acquires and develops land primarily for residential purposes; and constructs housing on such land. The company also offers various home designs, including single-family detached, townhomes, condominiums, and duplexes under the Centex, Pulte Homes, Del Webb, DiVosta Homes, John Wieland Homes and Neighborhoods, and American West brand names.
Read More - Current Price
- $110.52
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 9 Buy Ratings, 7 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $142.71 (29.1% Upside)
#3 - LGI Homes (NASDAQ:LGIH)
The last of the homebuilders on this list is LGI Homes, Inc. (NASDAQ: LGIH). The company specializes in serving the entry-level home market. However, they also build luxury homes under the Terrata Homes brand. LGI also does business in the single-family rental market.
In August 2023, the company introduced new single-family home communities in several states throughout the country including California, Washington, North Carolina, Florida, and Minnesota. And demand for new homes is only expected to increase in the next year, which gives the company a long runway for growth.
A note of caution for investors. Although analysts do forecast earnings growth over the next 12 months to exceed 60%, the LGI Homes analyst ratings on MarketBeat show a stock price that has that growth priced in. Still, based on its 52-week range, there is room for an upside surprise if the company continues to deliver strong earnings results in the next few quarters.
About LGI Homes
LGI Homes, Inc designs, constructs, and sells homes. It offers entry-level homes, such as attached and detached homes, and active adult homes under the LGI Homes brand name; and luxury series homes under the Terrata Homes brand name. The company also engages in the wholesale business, which include building and selling homes to large institutions looking to acquire single-family rental properties.
Read More - Current Price
- $91.20
- Consensus Rating
- Hold
- Ratings Breakdown
- 1 Buy Ratings, 1 Hold Ratings, 1 Sell Ratings.
- Consensus Price Target
- $122.33 (34.1% Upside)
#4 - Airbnb (NASDAQ:ABNB)
Airbnb, Inc. (NASDAQ: ABNB) is thought of as part of the travel and tourism sector. And it’s probably an understatement to note that business is booming. In its second-quarter 2023 earnings report, Airbnb reported a year-over-year (YOY) revenue increase of 19% with a net income margin of 26%.
But there’s a reason that Airbnb makes it onto a list of housing stocks. The company is in the early stages of an expansion into the long-term rental market. This is a strategic priority that goes beyond the “bleisure” trend.
In 2022, the company introduced a portfolio of Airbnb-friendly apartments in over 25 U.S. markets. These are units designed for long-term renters. However, once a renter finds a rental, they can list the property on Airbnb to offset a portion of their rent.
The existing home market likely to remain tight through 2024 and likely beyond. That gives Airbnb a long runway to grow. Analysts seem to agree. The company’s profits are forecast to increase by over 17% in the next year, and the ABNB stock price is expected to climb 15%.
About Airbnb
Airbnb, Inc, together with its subsidiaries, operates a platform that enables hosts to offer stays and experiences to guests worldwide. The company's marketplace connects hosts and guests online or through mobile devices to book spaces and experiences. It primarily offers private rooms, primary homes, and vacation homes.
Read More - Current Price
- $134.21
- Consensus Rating
- Hold
- Ratings Breakdown
- 8 Buy Ratings, 19 Hold Ratings, 6 Sell Ratings.
- Consensus Price Target
- $139.48 (3.9% Upside)
#5 - Lowe’s (NYSE:LOW)
Another peripheral industry to the housing sector is the home improvement retail channel. The duopoly among publicly traded companies is made up of the Lowe’s Companies, Inc. (NYSE: LOW) and The Home Depot, Inc. (NYSE: HD).
Each stock offers investors pros and cons. But based on the performance of each stock in 2023, the pick here is Lowe’s. The company is rapidly eating into Home Depot’s lead in the digital space. And Lowe’s has a strong relationship with the professional sector.
However, investors shouldn’t ignore the do-it-yourself (DIY) market. The company continues to see strength as consumers are choosing to love the home they’re in – particularly if that home comes with a mortgage that’s more than 50% lower than the current rate for a 30-year fixed mortgage.
LOW stock is up just under 12% (11.96%) in 2023 as of August 28. Lowe’s is also a dividend king having raised its dividend in each of the last 50 consecutive years.
About Lowe's Companies
Lowe's Companies, Inc, together with its subsidiaries, operates as a home improvement retailer in the United States. The company offers a line of products for construction, maintenance, repair, remodeling, and decorating. It also provides home improvement products, such as appliances, seasonal and outdoor living, lawn and garden, lumber, kitchens and bath, tools, paint, millwork, hardware, flooring, rough plumbing, building materials, décor, and electrical.
Read More - Current Price
- $247.72
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 16 Buy Ratings, 10 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $280.85 (13.4% Upside)
#6 - CareTrust REIT (NASDAQ:CTRE)
A different way to invest in housing stocks is through a real estate investment trust (REIT). And one that investors should consider in this space is the CareTrust REIT, Inc. (NASDAQ: CTRE).
The company’s portfolio of approximately 200 facilities in 25 states leans into the aging of America. This country is only at the beginning of what will be a decades-long trend that will expand the need for senior living facilities, including those of the long-term care variety.
The company has a forward P/E of around 13x and earnings are expected to grow by approximately 9% in the next 12 months.
REITs are known for delivering attractive dividend yields and payouts. As of August 28, 2023, CareTrust has a dividend yield of 5.88% and pays $1.12 per share on an annual basis. Plus, the company has increased its dividend for nine consecutive years.
About CareTrust REIT
CareTrust REIT, Inc's (CareTrust REIT or the Company) primary business consists of acquiring, financing, developing and owning real property to be leased to third-party tenants in the healthcare sector. As of March 31, 2024, the Company owned directly or through a joint venture and leased to independent operators, 228 skilled nursing facilities (SNFs), multi-service campuses, assisted living facilities (ALFs) and independent living facilities (ILFs) consisting of 24,189 operational beds and units located in 29 states with the highest concentration of properties by rental income located in California and Texas.
Read More - Current Price
- $27.36
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 3 Buy Ratings, 3 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $30.67 (12.1% Upside)
#7 - SPDR S&P Homebuilders ETF (NYSEARCA:XHB)
Last on this list of housing stocks is the SPDR S&P Homebuilders ETF (NYSEARCA: XHB). Exchange-traded funds are an effective way for investors to get exposure to a particular sector while smoothing out the volatility and risk that comes with owning any individual stock.
One of the reasons to like the XHB ETF is that its holdings include several homebuilders as well as companies in homebuilding adjacent industries such as The Home Depot, Williams-Sonoma, Inc. (NYSE: WSM), and Whirlpool Corporation (NYSE: WHR). This smooths out the risk even more because the performance of the ETF is not completely linked to the up-and-down of the housing starts numbers.
As of August 28, 2023, the company has $1.29 billion in assets under management and has an appealing expense ratio of just 0.35%.
About SPDR S&P Homebuilders ETF
SPDR S&P Homebuilders ETF (the Fund) seeks to closely match the returns and characteristics of the S&P Homebuilders Select Industry Index. The S&P Homebuilders Select Industry Index represents the homebuilding sub-industry portion of the S&P Total Markets Index. The S&P TMI tracks all the United States common stocks listed on the New York Stock Exchange, American Stock Exchange, National Association of Securities Dealers Automated Quotation (NASDAQ) National Market and NASDAQ Small Cap exchanges.
Read More - Current Price
- $105.99
- Consensus Rating
- Hold
- Ratings Breakdown
- 1 Buy Ratings, 19 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $105.99 (0.0% Downside)
The housing market is one of the cylinders that the engine of the economy relies on. When the housing market is weak, consumers feel like they have less purchasing power. And with fewer homeowners, there's less need for the products and service that are needed to keep homes in working order.
So far, however, that's where demand has been resilient. That doesn't mean that you can sound an all-clear for housing stocks. The bearish case largely comes from interest rates.
It's a math problem, and not a very complicated one. If you currently own a home with a mortgage that pays less than 4% - as many Americans do – there's little incentive to sell your home if you'll be carrying a mortgage of 8% and possibly higher.
But this has been the case for nearly 2 years, and so far, the housing market is stronger than many analysts expect. In any event, the housing market will be one of the sectors that leads the economy back. That's why now may be a good time to take a position in one or more of the stocks in this presentation.
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