Citigroup Inc.’s analysts see several catalysts supporting further homebuilder outperformance through the second half of 2023.
(Bloomberg) — Citigroup Inc.’s analysts see several catalysts supporting further homebuilder outperformance through the second half of 2023.
With spring selling season typically giving way to a slower summer, investors are focused on whether resilient buyer demand, solid home prices and a potential Fed pause will support further homebuilder outperformance through the end of this year. A gauge of homebuilders is currently up 33% year-to-date, compared to the S&P 500’s 12% gain for that same time period.
The group has potential to gain from underappreciated price increases, large builders continuing to take share from existing homes and smaller privates — as well as room for multiple expansion as housing forecasts are revised higher, analysts led by Anthony Pettinari wrote in a note Monday.
While net orders for the top three builders — D.R. Horton, Lennar Corp. and PulteGroup Inc. — are fairly stable, the group is poised for further net order acceleration in the second half, supported by easy volume compositions, the analysts wrote. In comparison, net orders fell by 23% year-over-year in the second half of 2022. While much of this growth is likely already priced into stocks, Citi analysts see execution on volume growth as a positive catalyst throughout the rest of the year.
“We view the opportunity for further recovery in builder sales prices as less fully reflected in the stocks,” they noted. Builders have been cautiously elevating prices and pulling back on incentives in select markets. And as builder pricing power gains traction, the analysts see further upside to their estimate.
Meanwhile, tight home resale inventories have created an opportunity for new home inventories to rise without creating oversupply. Since large public homebuilders have more resources than smaller peers and private builders, they’ve been able to navigate pandemic-induced supply chain tightness and the recent credit tightening following the Silicon Valley Bank collapse.
As a result, the top three public builders have seen their new home sales rise sharply after the pandemic to 30% of new homes sales versus 25% pre-pandemic and 14% post-global financial crisis, according to the note. The analysts expect this trend to continue, fueling builder outperformance compared to national housing data.
Lennar, which reports its second quarter results on Wednesday, will be the first builder to formally report May trends. Investors will be closely watching for signs that pricing has continued to gain traction in May and into early June. The stock has outperformed the broader market year-to-date, rising 28%, but still slightly underperforming builder peers.
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