Homebuilder Stocks to Buy Ahead of Looser Borrowing Rules

Sterne Agee thinks the Fed taper has already started in deed, if not in word. Mortgage rates have trended lower since peaking in early July, and this trend is expected to continue as banks may increasingly need more purchase mortgage volume to replace declining refinance volumes.

The Obama administration also is likely to have proposed looser lending standards for the Federal Housing Authority (FHA) and the Department of Housing and Urban Development (HUD) as a way to boost housing demand next year and increase U.S. economic activity. President Obama does not need congressional approval to change FHA and HUD lending standards, and the administration could implement new rules in time to have a positive impact on new home demand in the first half of 2014.

The analysts also note a meaningful drop in average credit scores for completed mortgages, and assuming that the trend continues, they see lower loan thresholds as potentially positive for housing demand. We would add that recent news of an increase in new household formation adds weight to this view.

Finally, consensus earnings per share (EPS) estimates for homebuilders in 2014 have declined an average of nearly 17% since reaching a peak in May. The new level of estimates more accurately reflects the slow growth environment, and if there is no tightening of underwriting standards, Sterne Agee sees these estimates as achievable.

D.R. Horton Inc. (NYSE: DHI) has a market cap of $6.15 billion and the stock closed Wednesday night at $19.05 in a 52-week range of $17.52 to $27.75. The consensus price target from Thomson First Call is around $23.80, indicating an implied gain of about 25%. The company met EPS estimates in its second fiscal quarter after handily beating them for the prior three quarters.

Meritage Homes Corp. (NYSE: MTH) has a market cap of $1.51 billion, and the stock closed at $41.63 Wednesday in a 52-week range of $32.33 to $52.95. The consensus price target is $51.00, which indicates an implied gain of about 22.5%. Meritage has easily beaten EPS in each of the past four quarters.

NVR Corp. (NYSE: NVR) has a market cap of $4.21 billion, and the stock closed at $925.53 in a 52-week range of $830.00 to $1,100.00. The consensus price target is around $950, indicating a potential upside of 2.6%. NVR beat EPS estimates in its most recent quarter but failed to meet projections in the prior two quarters.

MDC Holdings Inc. (NYSE: MDC) has a market cap of $1.38 billion, and shares closed last night at $28.15 in a 52-week range of $27.00 to $42.41. The consensus price target on the stock is around $35.35, for an implied gain of about 25%. MDC has beat EPS estimates in three of the past four quarters.

PulteGroup Inc. (NYSE: PHM) has a market cap of $6.52 billion, and the stock closed at $17.03 in a 52-week range of $14.23 to $4.47. The consensus price target on the stock is $20.00, yielding a potential upside of 17.6%. PulteGroup has bested EPS estimates in three of the past four quarters.

Ryland Group Inc. (NYSE: RYL) has a market cap of $1.7 billion, and the stock closed Wednesday at $36.77 in a 52-week range of $29.63 to $50.42. The consensus price target is $46.50, indicating an implied gain of about 26.5%. Ryland has beaten EPS estimates in each of the past four quarters.