Thanks to lower mortgage rates and strong consumer demand, home building is booming in the U.S. The iShares U.S. Home Construction ETF, which tracks home building stocks, was approaching all-time highs not seen in 14 years before the market's recent pullback.
Home building stocks have likewise risen quickly, but many market watchers believe this industry is poised for a breakout due to pent-up demand and low interest rates. Let's take a look at two strong home builders that stand to benefit.
An experienced home builder nails it
PulteGroup (PHM -3.54%), based in Atlanta, is still attractively valued and benefiting from rising building permits. The nation's third-largest home building company has a portfolio of companies that offers something for buyers in every phase of life.
On Jan. 28, PulteGroup reported fourth-quarter earnings of $1.22 per share, easily beating estimates of $1.09. The company's forward price-to-earnings ratio (P/E) is 10, which compares favorably with 11 for the home construction industry and 23 for the S&P 500. PulteGroup is estimating that 2020 sales will total 25,500 to 26,250 homes, which would beat the average Wall Street estimate of 24,885.
This home builder is constructing a great future
D. R. Horton (DHI -2.68%) describes itself as the largest home builder by volume in the U.S. since 2002. The company builds for buyers in every phase of life, with 67% of sales between $200,000 and $250,000.
The company's first-quarter 2020 earnings came in at $1.16 per share versus the $0.92 per share expected by Wall Street, a 27% upside surprise. D.R. Horton's forward P/E is a little under 11, which is also below the home construction industry and the S&P 500.
D. R. Horton is well positioned for fiscal 2020, having an inventory of 30,200 homes ready to meet spring season demand. New sales orders in the first quarter increased 19% year over year, and the company doesn't see it slowing down anytime soon. Wall Street sees the company building momentum as well, increasing fiscal 2020 earnings-per-share (EPS) estimates to $5.22 from $4.84 three months ago.
What does this mean for investors?
According to government statistics reporting January 2020 new home sales, the inventory of new homes for sale dropped to 324,000, representing a 5.1-month supply. New home supply hasn't been this low since 2017.
With unemployment at lows and the economy doing well, more consumers are shopping for new homes in a market with limited supply. Additionally, due to available real estate scarcity, more Americans are turning to new construction in order to lock in a low mortgage rate.
Both PulteGroup and D.R. Horton are experienced home building companies with the resources and market reach to take advantage of the tailwinds in the market. Investing in PulteGroup or D.R. Horton could be taking advantage of positive market pressures, resulting in higher share prices. Interest rate hikes are always a risk, but Tuesday's interest-rate cut is likely to help. However, any deterioration in the U.S. economy could affect savings rates and decrease home building.