Low Rates Driving Homebuilders: 3 UBS Top Picks to Buy Now

By Lee Jackson Updated Jan 13, 10:36AM EST · Published Apr 19, 10:45AM EDT

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Low Rates Driving Homebuilders: 3 UBS Top Picks to Buy Now — © Thinkstock

The Wall Street bears said that the positive momentum in the homebuilding sector would end as the Federal Reserve started to raise rates and mortgage rates started to push higher. That made good sense until rates that govern where mortgages are set dropped back to the same level they were at this time a year ago, and many think that the Fed may only raise rates once more this year.

In a new research report, UBS believes the housing market is moving to more volume-based growth, driven by the re-emergence of entry-level and first-time buyers. While UBS thinks that the overall rate of home price appreciation will start to ease, the report notes that it is easier to match supply to demand in more peripheral locations. The analysts look for this to play out over the next 18 to 24 months, giving the firm an optimistic outlook on the housing sector as a whole.

Three companies are the top picks in the sector at UBS, and all are rated Buy at the firm.

Lennar

This company remains a top pick and is well set in the entry-level market. Lennar Corp. (NYSE: LEN) is one of the nation’s largest builders of quality homes for all generations. The company builds affordable, move-up and retirement homes, primarily under the Lennar brand name.

Lennar’s Financial Services segment provides mortgage financing, title insurance and closing services for both buyers of the company’s homes and others. Lennar’s Rialto segment is a vertically integrated asset management platform focused on investing throughout the commercial real estate capital structure. Lennar’s Multifamily segment is a nationwide developer of high-quality multifamily rental properties.

Lennar investors receive a miniscule 0.35% dividend. The Thomson/First Call consensus price target for the stock is set at $54.44. The stock closed on Monday at $47.78 per share.
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PulteGroup

This is another top pick with a wide product portfolio. PulteGroup Inc. (NYSE: PHM) is involved in the acquisition and development of land primarily for residential purposes, as well as the construction of housing on that land. It offers various home designs, including single-family detached houses, townhouses, condominiums and duplexes under the Pulte Homes, Del Webb, Centex, DiVosta Homes, John Wieland Homes and Neighborhoods brand names.

As of December 31, 2015, the company controlled 138,079 lots, which included 95,919 company-owned lots and 42,160 lots under land option agreements. It also arranges financing through the origination of mortgage loans, principally for homebuyers; sells the servicing rights for the originated loans; and provides title insurance policies and examination and closing services to homebuyers.

The stock has trended higher since independent board member James Grosfeld resigned from the homebuilder’s board. In a letter attached to a Securities and Exchange Commission filing, Grosfeld said he resigned because since March 22, “I have been excluded from a number of subsequent Board meetings, and therefore see no useful purpose of remaining on the Board.” Grosfeld is said to own 1.7 million shares of the company.

PulteGroup investors are paid a 1.93% dividend. The consensus price target for the stock is $19.33, and the shares closed most recently at $18.69.

Toll Brothers

This company is more focused on the higher end of the market, and business remains good. Toll Brothers Inc. (NYSE: TOL) designs, builds, markets and arranges finance for detached and attached homes in luxury residential communities. The company operates through two segments: Traditional Home Building and City Living.

The company also builds and sells homes in urban infill markets under the Toll Brothers City Living name. In addition, the company develops, owns and operates golf courses and country clubs that are associated with various master planned communities; develops and sells land to other builders; and develops, operates and rents apartments. The company serves move-up, empty-nester, active-adult, age-qualified and second-home buyers in 19 states in the United States.

The stock moved up nicely recently after bullish remarks in Barron’s about the homebuilder’s future and how shares are currently a bargain. In recent years, the company has expanded into luxury condominium development in New York through its City Living division. “New York is not as strong as it was 18 months or two years ago, but it’s still a very good market,” CEO Douglas Yearley told Barron’s.

Toll Brothers has a consensus price target of $35.65. The stock closed Monday at $29.69 per share.
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While the sector has been solid for years, the growth in areas like Texas and other states in the south has continued to be strong. But with 30-year mortgage rates in the 3.75% range, you can bet the entry-level market that UBS is bullish on can continue to gain momentum.

About the Author Lee Jackson →

Lee Jackson has covered Wall Street analysts' equity and debt research and equity strategy daily for 24/7 Wall St. since 2012. His broad and diverse career, which included a stint as the creative services director at the NBC affiliate in Austin, Texas, gives him unique insight into the financial industry and world.

Lee Jackson's journey in the financial industry spans over 30 years, with nearly two decades as an institutional equity salesperson at Bear Stearns, Lehman Brothers, and Morgan Stanley. His career was marked by his presence on the sell side during pivotal Wall Street events, from the dot.com rise and bubble to the Long Term Capital Management debacle, 9/11, and the Great Recession of 2008. This is a testament to his resilience and adaptability in the face of market volatility.

Lee Jackson’s practical financial industry experience, acquired from a career at some of the biggest banks and brokerage firms, is complemented by a lifetime of writing on various platforms. This unique combination allows him to shed light on the intricacies and workings of Wall Street in a way that only someone with deep insider experience and knowledge can. Moreover, his extensive network across Wall Street continues to provide direct access for him and 24/7 Wall St., a privilege few firms enjoy.

Since 2012, Jackson’s work for 24/7 Wall St. has been featured in Barron’s, Yahoo Finance, MarketWatch, Business Insider, TradingView, Real Money, The Street, Seeking Alpha, Benzinga, and other media outlets. He attended the prestigious Cranbrook Schools in Bloomfield Hills, Michigan, and has a degree in broadcasting from the Specs Howard School of Media Arts.