Why Homebuilders May Be the Best Place to Invest Now

By Lee Jackson Updated Jan 30, 3:24PM EST · Published Sep 26, 10:05AM EDT

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Why Homebuilders May Be the Best Place to Invest Now — © jhorrocks / Getty Images

With interest rates and, in tandem, mortgage rates falling to the lowest levels in years, it makes sense that some on Wall Street are looking to the top homebuilders as consumer interest heats up again. With traffic to real estate websites surging, and pent-up demand, especially in the entry-level market, exploding, it makes sense to look at the top companies in the industry.

Merrill Lynch points out that new home sales surged 7.1% month over month in August to 713,000 units, well surpassing consensus expectations of 659,000. In addition, it has been noted that the older millennials are stepping in to home buying, with many now very positive over their first home purchase.

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We screened the Merrill Lynch homebuilder research universe looking for companies rated Buy and found two that are very solid picks now. With interest rates likely to stay low for years, this could be a longer term trend.

D.R. Horton

This is one of the highest volume builders in the United States and a top pick at Merrill. D.R. Horton Inc. (NYSE: DHI | DHI Price Prediction) is the largest public builder by closings in the country, delivering roughly 52,000 homes in 2018. It is positioned in 79 metropolitan markets in six major regions and develops single-family homes primarily for first-time and move-up buyers.

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Approximately 80% of revenue comes from the Southeast, South Central and West regions, all of which continue to see very solid growth. The company also provides mortgage financing and title agency services to homebuyers.

The company boasts some of the highest quality and fastest growth potential via entry-level exposure and competitively advantaged market share, and it can weather cost pressures with strong free cash flow. Most on Wall Street see upside to estimates from the usage of its $1 billion operating cash flows per year. The company’s priorities are share buybacks, debt reduction and bolt-on mergers and acquisitions.

Shareholders receive a 1.14% dividend. The Merrill price target for the shares is $65, while the Wall Street consensus target is much lower at $53.09. The shares traded Thursday at $52.65 apiece.

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Lennar

This company is another top pick at Merrill and is well set in the entry-level market. Lennar Corp. (NYSE: LEN) is the second largest public homebuilder by closings in the United States, delivering over 49,000 homes in 2018. The company is well positioned in 21 states in 49 markets in four major regions, targeting first-time, move-up and active adult buyers.

Lennar has diversified its core homebuilding operations with the addition of real estate investment and management, multifamily and single-family, and commercial real estate development in California. The company also owns a financial services business.

Lennar offers investors a miniscule 0.29% dividend. Merrill has a $64 price target, and the posted consensus figure is $60.44. The stock was trading at $55.85 a share.

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These two stocks have solid upside to their respective targets. With the mortgage interest levels raised, the great majority of the homes sold by these companies will be eligible for the deduction. In addition, if mortgage rates continue to fall the rest of 2019 and next year, sales should continue to move higher, possibly much higher.

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.