In Berkshire Hathaway's (BRK.A -0.29%) (BRK.B 0.07%) latest 13F filing, investors saw that Warren Buffett and his team remain a net seller of stocks. However, there was a very interesting addition to the portfolio. Well, three additions to be precise.

In the second quarter, Berkshire added not one, but three different homebuilders to its portfolio. They are three of the largest U.S. builders, D.R. Horton (DHI 0.17%), NVR (NVR 1.46%), and Lennar (LEN -0.42%). And despite all three performing very well so far in 2023, I think there could be much more upside ahead.

A strong market for homebuilders

It might seem like it would be a horrible environment for homebuilders. After all, the average selling price of homes in the United States is up by more than 40% from comparable 2019 levels, and mortgage rates are sitting at about 7.5%, the highest in more than two decades.

While it's true that homes are far less affordable, the rapid rise in mortgage rates has resulted in a historically low level of existing homes for sale. Many homeowners have mortgage rates below 4% (or even below 3%) and quite frankly don't want to give them up by moving. As a result, existing-home inventory has fallen to a generational low.

US Existing Home Inventory Chart

U.S. existing home inventory data by YCharts.

Meanwhile, there are still some people who need to buy homes. People have to move for work, new households are formed, etc. And homebuilders are stepping in to fill the gap.

Consider the recent data: New-home sales now make up 33% of the homes listed for sale in the United States, compared with an average of just 13% from 2000 to 2019.

In addition, homebuilders have some key advantages in the current market. They can offer incentives to buyers that sellers of existing homes can't, especially when it comes to financing.

One homebuilder is advertising a mortgage with a 5.99% annual percentage rate, with a temporary rate of just 3.99% for the first year. (Essentially, the builder is paying a mortgage partner to give a below-market rate.) This can make a big difference in affordability for buyers, compared to prevailing 7.5% average rates. Plus, they can focus on smaller, entry-level (i.e., more affordable) homes. 

As a result, homebuilders have significantly outperformed expectations. In the most recent fiscal quarter, D.R. Horton saw new orders spike by 37% year over year. NVR's orders increased by 27%, and the builder also saw its cancellation rate decline by 300 basis points compared with year-ago levels. When mortgage rates initially spiked higher, homebuilder cancellation rates soared, but it appears this trend has reversed course as new homes have emerged as an attractive option for buyers.

And Lennar delivered 13% more homes year over year in its most recent quarter, as well as a 21% revenue jump.

Valuations are still attractive

To be fair, all three of these stocks are significantly more expensive than they were at the beginning of the year. So far in 2023, these homebuilders have risen by 29% to 36% thanks to stronger-than-expected results.

However, all three still look attractively valued, even after the recent gains.

Company

YTD Price Change

Forward P/E Ratio

D.R. Horton

32%

8.6

NVR

36%

14.2

Lennar

29%

8.8

Data source: CNBC. YTD = year to date; P/E = price to earnings.

Furthermore, while there have already been some positive catalysts for homebuilders, and their businesses are performing better than expected, they stand to benefit tremendously if/when mortgage rates fall and buyers come back into the market at historically normal levels.

And the fact that many homebuilders have started to focus more of their efforts on smaller, more affordable homes could be an extremely positive long-term growth driver. After all, the U.S. still has a shortage of nearly 4 million homes, and while this includes multifamily housing, single-family homes could enjoy a steady tailwind as well.

Which is the best homebuilder to buy?

There's a solid argument to be made for any of these three homebuilders. NVR is the most expensive of the three on a P/E basis, but also is the best positioned for recessions and slower real estate markets due to its land-light business model.

All three should be beneficiaries of the current real estate market, as well as the long-tailed housing demand that is likely to occur as the market normalizes. And this is likely why Buffett and his team took a basket approach by buying three homebuilders, not just one.