Home Builders Trade At Low Multiples. Are They A Value?

Our theme of Housing Stocks, which includes the stocks of home builders, building products companies, and home improvement players, has declined by about 22% year-to-date, compared to the S&P 500, which remains down by about 8% over the same period. This comes after a strong 2021, when the theme considerably outperformed the broader markets, rising by about 44%. The recent sell-off comes amid the rising interest rate environment, with 30-year mortgage rates rising to close to 4% from levels of under 3% a year ago, driving up financing costs for home buyers. Moreover, inflation in the U.S. has surged to 40-year highs and this could also drive up costs and make housing less affordable. Separately, the ongoing war between Russia and Ukraine has also created some uncertainty and this could be weighing on the sector to an extent. So what’s the outlook like for the theme?

While there are clearly pressures on the cost side, the U.S. continues to benefit from very strong labor markets and rising wages and this could continue to be a key driver of demand for housing. Moreover, valuation multiples in the sector are also quite low. For example, the stocks of top home builders such as D.R. Horton and Lennar trade at just around 5.5x consensus 2022 earnings, despite consensus revenue growth rates for this year standing at over 20% for both companies. Now although this rate of growth might not be durable, given the cyclical nature of the housing market and concerns regarding elevated home prices, the theme is still valued attractively versus the broader S&P 500, which trades at over 19x forward earnings.

Within our theme, the Installed Building Products stock, an installation contractor for insulation for residential and commercial projects, has been the worst performer, declining by about 30% year-to-date, driven by weaker than expected Q4 2021 earnings. On the other side, KB Home stock, a Los Angeles-based home builder that focuses on homes for first-time homebuyers, has fared a bit better than the other stocks in our theme, declining by just about 11% year-to-date.

Here you’ll find our previous coverage of the Housing Stocks, where you can track our view over time.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since the end of 2016.

Invest with Trefis Market Beating Portfolios

See all Trefis Price Estimates