3 Homebuilder Stocks to Buy on Tight Supply and High Demand

Stocks to buy

When mortgage rates started to increase rapidly in the middle of 2022, the real estate market ground to a halt. Then, prices started to drop.

Now, current median sales price for existing homes is still 5% lower than at the market’s height in May 2022. In March 2024, sales decreased year-over-year (YOY) in all regions of the U.S.

It’s slow going in the new construction segment of the real estate industry, too. By the end of 2023, more than 30% of homebuilders had cut prices. The median sales price of new homes in 2023 was $428,200, 6% less than 2022. Last year, almost two thirds of builders offered incentives like closing cost assistance to increase sales. That may not seem like the home building market is thriving. But for investors, it’s an opportunity to buy the dip.

In 2024, things are looking more optimistic. New home starts rebounded sharply in February, increasing 12% YOY, the highest level in nearly two years. The new construction timeline can be long. Even the country’s biggest builders can take a year or more to complete a home. But that’s why investors should be looking at homebuilder stocks to buy now. There is hope that, by the time these new starts are completed, interest rates will have gone down and builders will be able to start increasing prices again. Also, they’ll have more inventory to sell, which leads to more profit potential. When that happens, investors who buy in now will be the ones to reap the rewards.

Let’s examine the three strongest homebuilder stocks to buy right now.

D.R. Horton (DHI)

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D.R. Horton (NYSE:DHI) is America’s largest homebuilder. The stock has increased 229% in the last five years and 34% in the last 12 months. YTD it’s down 2%. When you’re the biggest in an industry, it’s easier to weather the storms of market uncertainty and that holds true for D.R. Horton. The company’s fiscal year Q2 results were strong. They showcased its ability to withstand the negative outside forces of high interest rates. 

In the second quarter, revenue increased by 14% YOY, net sales orders were up 14% and the company closed 22,548 homes for a total of $8.5 billion in sales. DHI continues to focus on the entry-level housing market with many of its communities offering affordable homes. The first time home buyer and budget home buyer demographics are going to carry builders through the next couple of years. Furthermore, D.R. Horton’s Express Homes brand is already in a good position to provide what buyers are looking for. 

PulteGroup (PHM)

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PulteGroup (NYSE:PHM) is the third largest homebuilder in the U.S. and sells half as much by dollar volume as D.R. Horton. But in analysts’ eyes, PHM remains a strong pick with a 10% upside. Multiple analysts raised their targets on it since the publication of their Q1 numbers.

Home sale revenue increased 10% YOY, home closings increased 11% and net new orders increased 14%. Its earnings per share beat estimates by 30%, coming in at $3.10 versus the consensus of $2.36.

Like D.R. Horton, Pulte has additional brands outside its namesake. Those include Centex, targeted toward first time and budget buyers and DelWebb, which builds active adult 55+ communities. By focusing on both demographics, it’s able to diversify its offerings for the two largest growing groups of homebuyers. With its broad portfolio, PulteGroup is one of the industry’s most versatile home builders. Therefore, it is able to economically meet the needs of multiple buyer groups and respond to changing consumer demand.

YTD, the stock is up 14%, up 70% in the last 12 months and 259% in the last five years.

Toll Brothers (TOL)

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Toll Brothers (NYSE:TOL) is substantially smaller than both of the other builders on this list. But YTD, the company has seen an impressive 26% growth. Over the past 12 months it’s up 96% and 230% in the last five years. Toll Brothers considers itself the nation’s leading builder of luxury homes.

But catering to the luxury market seems to be working for Toll Brothers. The company released strong Q1 results in February. Home sales revenues were up 10% YOY, delivered homes were up 6% and contracted homes were up 40%.

“Our balance sheet is solid, we have ample liquidity, no significant near-term debt maturities, and we expect to generate significant cash flow from operations in fiscal 2024,” shared Douglas Yearley, Jr., chairman and Chief Executive Officer (CEO). “This will enable us to continue investing in our business while also returning cash to stockholders throughout the year.”

Certainly, that’s a healthy position considering current market trends and the fact that Toll Brothers is a smaller builder.

On the date of publication, Philippa Main did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Philippa Main is a real estate agent in Virginia and Florida who also does freelance writing, editing, and business development and marketing. She uses her broad knowledge of the real estate market to inform her investing decisions in an array of different industries. She also enjoys working specifically with women to educate them about finance and investing.

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