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Zacks Industry Outlook Highlights: Lennar, D.R. Horton, Toll Brothers, KB Home and Beazer Homes USA

For Immediate Release

Chicago, IL – April 05, 2016 – Today, Zacks Equity Research discusses the Homebuilders, (Part 2), including Lennar Corporation (LEN), D.R. Horton, Inc. (DHI), Toll Brothers, Inc. (TOL), KB Home (KBH) and Beazer Homes USA Inc. (BZH).

Industry: Homebuilders, Part 2

Link:http://www.zacks.com/commentary/76847/factors-to-boost-housi...

Though demand trends remain positive in the housing market, labor shortages, extended land development timelines and rising labor and land costs are tying homebuilders down.

That said, overall housing demand remains solid at the start of the busy spring season. With an improving economy, encouraging job numbers and affordable mortgage rates, homebuilding should gain further steam as the year progresses. For that matter, there are plenty of reasons to be optimistic about the broader housing sector over both the short and long terms.

Below, we discuss some of the key reasons driving the sector and what investors can look forward to in the coming months and years.

Affordable Mortgage Rates, Moderating Home Price Gains

Housing was an affordable option in 2015 as mortgage rates remained near historic lows. According to the Freddie Mac mortgage survey, the 30-year fixed mortgage rate went down from 4.17% in 2014 to 3.85% in 2015. In 2016, the trend continues with rates going down further to 3.66% in February. Even if mortgage/interest rates rise with the Fed probably announcing further federal fund rate hikes later in the year, the rates should remain reasonable.

With stabilizing demand, housing price gains are also moderating. According to Clear Capital, a provider of real estate data and analysis, home price increases moderated in 2015 from 2014 levels. Home prices are expected to moderate even more in 2016. Clear Capital predicts home price appreciation in the range of 1% to 3% by Jan 2017.

Low mortgage rates and moderating home price gains give homebuyers the much-needed confidence. This, in turn, stokes demand.

Economy Picking Up

The drop in oil prices, a strong dollar, China growth worries and a sluggish global economy resulted in a massive sell-off in the U.S. stock market at the start of the year.

However, the U.S. stock market staged an impressive recovery in the past month, easing fears of a recession and infusing the economy with confidence.

Improving economic growth supported by a better employment picture generally boosts household formations and provides a basis for stronger housing demand.

So far in 2016, the employment numbers have been particularly strong. With a fall in the unemployment rate, rising wages and decent consumer confidence, the U.S. economy looks quite strong despite rising pressure elsewhere. Improving consumer spending power is a sure way of propelling demand for homes.

Other Factors

Apartment rental rates have been moving up, making home buying financially attractive. Additionally, as the Millennial generation leaves their parents’ homes, a sharp spike in household formation is translating into higher demand for new homes.

Further, there is a production deficit of both rental and new homes compared with housing demand, resulting in pent-up demand against limited supply. Land and labor shortage is limiting the production of homes.

With oil prices remaining subdued and the job market looking good, the demand for new homes is on the rise.

Land as Native Strength

Though global concerns have weighed on economic outlook, homebuilders are committed to growing their community count and are strategically acquiring well-located communities that will probably deliver high returns on investment.

Homebuilders like Lennar Corporation (LEN), D.R. Horton, Inc. (DHI) and Toll Brothers, Inc. ( TOL) with a strong capital position are able to carefully and methodically add to their land holdings while less well positioned homebuilders are seeing an erosion in their profits.

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. to name a few – where land is scarce and approvals not easy to come by.

Lennar has strategically shifted away from a land-heavy acquisition strategy in the early stages of the recovery to acquiring lands with a shorter two to three-year average life to improve its returns.

Other homebuilders too have realized the importance of land investments to support future growth. Even smaller players like KB Home (KBH) and Beazer Homes USA Inc. ( BZH) are stepping up their land investments to strengthen their position in an improving housing market.

Conclusion

Though they admit to rising labor shortages, homebuilders in general seem quite optimistic about improving demand trends in 2016.

Investors could definitely take advantage of the opportunities in the near term and cash in on any sudden surge in the homebuilding sector.

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LENNAR CORP -A (LEN): Free Stock Analysis Report
 
D R HORTON INC (DHI): Free Stock Analysis Report
 
TOLL BROTHERS (TOL): Free Stock Analysis Report
 
KB HOME (KBH): Free Stock Analysis Report
 
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