The Zacks Building Products – Home Builders industry comprises manufacturers of residential and commercial buildings. Some of the industry players are involved in providing financial services that include selling mortgages and collecting fees for title insurance agency and closing services.Notable companies in the industry include Lennar Corporation (LEN), NVR, Inc. (NVR), D.R. Horton, Inc. (DHI), PulteGroup, Inc. (PHM) and Toll Brothers, Inc. (TOL).
Let’s take a look at the industry’s three major themes:The U.S. Federal Reserve’s dovish monetary stance and lower mortgage rates have been driving this rate-sensitive housing market. Raw material prices — which have been increasing over the past few months due to the initial effects of tariffs on items like steel, aluminum and softwood lumber — are now dropping. This should provide a meaningful boost to margins in the near term. According to an Associated Builders and Contractors’ analysis of information provided by the U.S. Bureau of Labor Statistics, while there may be anecdotal shortages of some inputs as the global supply chain buckles owing to the coronavirus outbreak, materials prices are set to decline. Additionally, the need to rebuild inventories is expected to drive the U.S. housing aggressively. Meanwhile, the industry participants have been focusing on acquiring low-cost new home sites in well-positioned markets during the downturn, which placed the companies well to meet growing demand during the upturn, in turn lending them a significant competitive advantage. The companies have also been controlling construction costs by designing homes efficiently and also obtaining construction materials and labor at competitive prices. Homebuilders are also following a dynamic pricing model, which enables it to set price according to the evolving market conditions. However, as the recent coronavirus outbreak has roiled global stock markets and in turn the world economy, how will the U.S. housing market fare in the near term when the lowest mortgage rates on record are colliding with the prospect of a coronavirus outbreak-induced economic downturn? The U.S. housing market — which was on a strong foothold before the crisis began — is likely to slow down a bit in the near term. It is reflected in the latest housing starts & permit data and monthly homebuilder confidence index. Notably, although confidence level remained solid, sales expectation for the next six months dropped, depicting the escalating economic uncertainties arising from the outbreak. Also, the U.S. housing starts dropped in February after surging for four straight months. Building permits also tumbled in February, reflecting builders’ inability to ramp up construction even though borrowing costs have been declining steeply. The COVID-19 outbreak and response to the health crisis in various countries are likely to have a lingering impact on the supply chain in the near term, which may impact builders’ ability to deliver in time. Overall, the pandemic is likely to weaken sales in the months ahead that could support economists’ anticipation of a consumer-led recession by the second quarter. Again, shortage of skilled labor continues to be a pressing concern. Homebuilders continue to be cautiously optimistic about the industry’s prospects owing to rising land and labor costs.
Meanwhile, softness in home purchases in the high-end housing market segment, in response to affordability challenges and general market uncertainty, is a cause of concern. This has been impacting the order flow for luxury homebuilders like Toll Brothers.