Zacks Industry Outlook Highlights: Lennar, Toll Brothers and PulteGroup

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Dec 16, 2014, 09:30 ET

CHICAGO, Dec. 16, 2014 /PRNewswire/ -- Today, Zacks Equity Research discusses the Homebuilding, part 2, including Lennar Corporation (NYSE:LEN-Free Report), Toll Brothers, Inc. (NYSE:TOL-Free Report) and PulteGroup, Inc. (NYSE:PHM-Free Report).

Industry: Homebuilding, part 2

Link: http://www.zacks.com/commentary/36093/homebuilding-on-a-rebound-buy-these-stocks

The housing sector has come a long way from the lows witnessed in mid-2006 due to the severe and widespread downturn. Housing demand and sales are now growing, though at a slow pace, with the strengthening employment picture, a favorable affordability dynamic and a low level of housing inventory.

Worries still persist in the form of a possible rise in interest/mortgage rates in 2015 with the Federal Reserve closing the 'quantitative easing' program in October. Higher interest/mortgage interest rates may have a moderating effect on housing demand and pricing.

And yet, there are plenty of reasons to be optimistic about the broader housing sector over both the short and long term. Below, we discuss some of these key reasons and what investors in the housing sector can look forward to in the coming months and years.

Beyond these positives, however, keep in mind that this industry has lagged the broader market this year despite stronger earnings and cash flows. As such, you wouldn't need to search as hard for finding good values as you will need to elsewhere.

Firming Home Prices & Stabilizing Mortgage Rates Can Spur Demand

Most homebuilding companies have been witnessing average price increases across all operating regions. This has been mostly driven by a shift to higher-priced homes as well as market driven price increases.

The rise in home prices has however moderated to an extent in 2014. The median existing-home price rose 5.5% in October but it was much less than the 11.5% increase seen in the comparable year-ago period.

Another report from the S&P/Case-Shiller home price data through September showed a persistent slowdown in price increases this year. The year-over-year reading for the 20-city index showed price increase of 4.9% in September, softer than the 5.6% in August.

Meanwhile, mortgage rates in 2014 are still below historical levels, though it has risen from the 2013 average, making housing an affordable option. According to the Freddie Mac mortgage survey, the 30-year fixed mortgage rate has gone down from 4.43% in January to 4.04% in October.

Low mortgage rates and moderating home prices are expected to give homebuyers the much needed confidence paving the way for higher home demand going into 2015.

Improving Economic Growth

An improving economic and employment picture and growing consumer confidence have led to a slow but steady housing recovery this year, mainly in the second half.

It is generally believed that the U.S. economy should sustain the growth seen in 2014 next year and do even better. There are several reasons in support of this optimistic outlook. Lower energy costs encourage consumer spending, while further easing of credit conditions and more upbeat consumer and business confidence all foretell faster economic growth in 2015.

Land as Native Strength

Homebuilders like Lennar Corporation (NYSE:LEN-Free Report) and Toll Brothers, Inc. (NYSE:TOL-Free Report) with a solid land position have been able to better capitalize on rising demand for homes during the upturn.

Toll Brothers has secured some of the most sought after urban locations in the country – like New York City Market, Northern New Jersey, Philadelphia and Washington D.C. – where land is scarce and approvals are not easy to come by.

Lennar's diligent land purchases and growing community count position it well to generate high returns in the future. The Florida based homebuilder expects to continue to invest in carefully underwritten strategic land acquisitions in well-positioned markets.

Other homebuilders have realized the importance of land investments to support future growth. PulteGroup, Inc. (NYSE:PHM-Free Report) plans to spend $1.8 billion on land and related development in 2014, up 40% year over year. It further aims to speed up investments to $2.4 billion in 2015, which is $600 million to $700 million over the expected land expenditures in 2014.

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