One reason for the recent stock market volatility came from a dip in the 30-year mortgage rate. On August 9, 2024, the 30-year average mortgage rate dropped to 6.5%. That's the lowest it's been since May 2023. And the 30-year fixed-rate mortgage is down even more at 6.3%.
The decline is due to technical factors. Specifically, long-term bond yields. Many institutional investors now expect the Federal Reserve to cut interest rates in September, and perhaps by as much as 50 basis points. That is causing a flight into long-term (10-year) Treasury bonds. Since bond prices and bond yields have an inverse relationship, the yield on the 10-year is down and... voila! You have a decline in mortgage rates.
Adding fuel to the rally, the National Association of Realtors (NAR) expects moderately lower mortgage rates in the second half of 2024 with more home sales and price stability.
This combination of lower mortgage rates and increased housing activity will likely be bullish for housing stocks. In this special presentation, we look at seven housing stocks that stand to benefit from this trend.
Quick Links
- Zillow
- M/I Homes
- KB Home
- PulteGroup
- Sun Communities
- Sherwin-Williams
- Two Harbors Investment Corp.
#1 - Zillow (NASDAQ:Z)
One reason investors believe we’re on the verge of a housing market revival comes from the recent earnings report from Zillow Group Inc. (NASDAQ: Z). Zillow is the number one U.S. residential real estate app. According to the company’s internal research, “70% of all home buyers and sellers use Zillow at some point in their transaction.”
The company generates revenue by providing advertising and related services to realtors. In the second quarter of 2024, it generated $572 million, 13% higher than Zillow’s own estimates. Drilling into the specifics, Zillow generated $34 million in revenue from its Mortgages business, a 42% year-over-year (YOY) increase. A key catalyst for this growth was a 125% YOY increase in purchase loan origination volume.
Z stock is down over 10% in 2024 but posted a 22% gain in the three months heading into earnings. The Zillow analyst forecast on MarketBeat suggests an 11% upside for Z stock. Much of that is due to expectations that Zillow will post positive earnings sometime in the next 12 months.
About Zillow Group
Zillow Group, Inc operates real estate brands in mobile applications and Websites in the United States. The company offers premier agent and rentals marketplaces, new construction marketplaces, advertising, display advertising, and business technology solutions, as well as dotloop and floor plans. It also provides mortgage originations and the sale of mortgages, and advertising to mortgage lenders and other mortgage professionals; and title and escrow services.
Read More - Current Price
- $62.81
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 6 Buy Ratings, 3 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $63.20 (0.6% Upside)
#2 - M/I Homes (NYSE:MHO)
If the housing market recovers, homebuilder stocks will benefit. Falling mortgage rates is one thing, but having homes available to buy will be the key to sparking a rally with staying power.
M/I Homes Inc. (NYSE: MHO) is one of the leading single-family home builders. It operates in nine states including several of the states that have seen a population surge from the great relocation (Florida, Texas, North Carolina, and Tennessee).
On July 30, 2024, M/I Homes delivered its second-quarter earnings report. The company beat revenue and earnings expectations and both numbers were higher YOY. A key reason for this is the company’s net profit margin of 12.7%, which is above the industry average of 10.9%.
Although MHO stock is up 48% in the last year, it’s up just 4.9% in 2024. That’s lagging other homebuilder stocks, which creates an opportunity for investors looking for value in this sector.
About M/I Homes
M/I Homes, Inc, together with its subsidiaries, engages in the construction and sale of single-family residential homes in Ohio, Indiana, Illinois, Minnesota, Michigan, Florida, Texas, North Carolina, and Tennessee. The company operates through Northern Homebuilding, Southern Homebuilding, and Financial Services segments.
Read More - Current Price
- $166.71
- Consensus Rating
- Buy
- Ratings Breakdown
- 1 Buy Ratings, 1 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $170.00 (2.0% Upside)
#3 - KB Home (NYSE:KBH)
Another homebuilder stock to consider as mortgage rates decline is KB Home (NYSE: KBH). The company is the sixth-largest homebuilder in the United States and operates in four major markets broadly listed as West Coast, Southwest, Central, and Southeast. Its Built-to-Order approach enables a more personalized experience, which provides a competitive advantage and higher revenues.
As of August 12, 2024, KBH stock is trading near its 52-week high with a consensus rating of Hold. That could lead investors to believe the growth is priced in. In the company’s second-quarter earnings report in June, it beat on the top and bottom lines, but revenue came in lighter YOY. That initially dragged KBH stock down about 5%, but the stock has since rallied and is up more than 14% in the three months ending April 12, 2024.
The KB Home analysts tracked by MarketBeat are forecasting a higher price target for KBH stock, with Evercore being the most bullish with an $89 price target.
About KB Home
KB Home operates as a homebuilding company in the United States. It operates through four segments: West Coast, Southwest, Central, and Southeast. It builds and sells various homes, including attached and detached single-family residential homes, townhomes, and condominiums primarily for first-time, first move-up, second move-up, and active adult homebuyers.
Read More - Current Price
- $86.75
- Consensus Rating
- Hold
- Ratings Breakdown
- 5 Buy Ratings, 5 Hold Ratings, 3 Sell Ratings.
- Consensus Price Target
- $73.71 (15.0% Downside)
#4 - PulteGroup (NYSE:PHM)
The third and final homebuilder stock we’re looking at right now is PulteGroup Inc. (NYSE: PHM). As of 2023, the company is the third-largest U.S. homebuilder based on the number of homes closed. PulteGroup operates in a wide geographic range that covers large pockets of the United States. If the United States is going to make up the 4.5 million new home shortage, it will be companies like PulteGroup leading the way.
The company also has a proven history of increasing shareholder value. Since 2015, the company has returned over $3.1 billion to shareholders through dividends and share repurchases. And in the last five years, the total return on KBH stock has been 228%, meaning $1,000 invested in August 2019 would be worth $2,880 as of August 2024.
Analysts agree. The PulteGroup analyst forecast on MarketBeat has 15 analysts offering a consensus Moderate Buy rating on PHM stock. The consensus price target of $133.14 is only a 9% increase, but several analysts have bid the stock higher, including JPMorgan Chase & Co. which gives PHM stock a $152 price target.
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
- $140.46
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 10 Buy Ratings, 6 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $133.14 (5.2% Downside)
#5 - Sun Communities (NYSE:SUI)
Sun Communities Inc. (NYSE: SUI) is a fully integrated real estate investment trust (REIT) with a portfolio of 667 properties that are made up of manufactured homes, recreational vehicles, and marinas. It's the first part that merits consideration in 2024.
Manufactured homes are priced at the low end of the property market. Potential buyers may have preconceived notions of these homes, but in a tight housing market, the value shouldn’t be overlooked. Sun Communities provides manufactured homes that provide 25% more space at approximately 50% less cost per square foot of other rental options. As of this writing, the company had over 97% occupancy at all of its manufacturing home sites in the United States.
That said, SUI is a defensive stock that has delivered a total return of only 3.73% in the last five years. However, in the last 12 months, that return has jumped to 6.93%. This implies that homebuyers may be willing to trade down to find affordable housing wherever they can.
About Sun Communities
Established in 1975, Sun Communities, Inc became a publicly owned corporation in December 1993. The Company is a fully integrated REIT listed on the New York Stock Exchange under the symbol: SUI. As of December 31, 2023, the Company owned, operated, or had an interest in a portfolio of 667 developed MH, RV and Marina properties comprising 179,310 developed sites and approximately 48,030 wet slips and dry storage spaces in the U.S., the UK and Canada.
- Current Price
- $144.74
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 5 Buy Ratings, 5 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $138.09 (4.6% Downside)
#6 - Sherwin-Williams (NYSE:SHW)
The bullish case for The Sherwin-Williams Company (NYSE: SHW) is two-fold. If the housing market remains sluggish, painting is still one of the more cost-effective renovations that homeowners can make.
However, if the housing market begins to take off, one of the first things that new homeowners will do is paint – especially in new constructions. And fall is one of the best times of year for interior painting projects.
In the second quarter, Sherwin-Williams reported mixed results, beating on earnings but coming in slightly light on revenue. However, both numbers were a YOY beat, which may explain why the stock is up 10.8% in 2024.
Analysts maintain a Moderate Buy rating on the stock. The consensus price target implies just a 3% gain. However, analysts from Morgan Stanley and Royal Bank of Canada have significantly higher price targets for SHW stock, $375 and $408, respectively. It’s important to add that Sherwin-Williams is a dividend aristocrat with a 47-year streak of increasing its dividend.
About Sherwin-Williams
The Sherwin-Williams Company engages in the development, manufacture, distribution, and sale of paints, coating, and related products to professional, industrial, commercial, and retail customers. It operates through three segments: Paint Stores Group, Consumer Brands Group, and Performance Coatings Group.
Read More - Current Price
- $378.00
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 15 Buy Ratings, 6 Hold Ratings, 1 Sell Ratings.
- Consensus Price Target
- $362.68 (4.1% Downside)
#7 - Two Harbors Investment Corp. (NYSE:TWO)
Another real estate investment trust to consider is Two Harbors Investment Corp. (NYSE: TWO). The company invests in mortgage servicing rights, residential mortgage-backed securities, and other financial assets. At a time when U.S. foreclosures remain above levels reached during the pandemic, a company that focuses on RMBS may seem like a risky bet. However, the principal and interest on these securities are backed by Freddie Mae, Freddie Mac, or other government agencies.
Many investors buy REITS for predictable, growing dividends. That may leave you wanting with Two Harbors. Mortgage REITs tend to be total return investments, meaning you reinvest dividends, which have the tendency to get cut. That’s been the case with TWO stock.
With that in mind, an investment in Two Harbors should be based on the belief that earnings will grow as interest rates fall. If that happens, analysts may start to raise their price targets for TWO stock.
About Two Harbors Investment
Two Harbors Investment Corp. invests in, finances, and manages mortgage servicing rights (MSRs), agency residential mortgage-backed securities (RMBS), and other financial assets through RoundPoint in the United States. The company target assets include agency RMBS collateralized by fixed rate mortgage loans, adjustable rate mortgage loans, hybrid mortgage loans, or derivatives; and other assets, such as financial and mortgage-related assets, including non-agency securities and non-hedging transactions.
Read More - Current Price
- $14.10
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 3 Buy Ratings, 3 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $14.90 (5.7% Upside)
Now that you have a few housing stocks to consider buying, the question comes down to how much you believe that sellers will be willing to put up the “For Sale" sign. Like many things related to the market, there are two sides to consider.
The bullish case for housing stocks centers on the idea that this dip in mortgage rates will spur buying activity, particularly for buyers who have been sitting on the sidelines waiting for any relief in mortgage rates.
But for every bull case, there's a bear case. In mid-August, investors will get the next read on inflation when the July readings of the Producer Price Index (PPI) and Consumer Price Index (CPI) are released. If those prints show inflation starting to run hotter, you could see expectations for a rate cut decline, and that could dampen home-buying enthusiasm.
That said, the housing market has been remarkably resilient, even as many Americans realize the days of 3% or lower mortgages are over.
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