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Why homebuilder stocks may be able to go even higher

Homebuilder stocks have surged lately, and according to one Deutsche Bank analyst, they may have even more room to run. Yahoo Finance's Dani Romero takes a look at the winners and losers among homebuilder stocks.

Video transcript


RACHELLE AKUFFO: A string of strong earnings from homebuilders has powered impressive stock gains, further fueling an upbeat sentiment from Deutsche Bank analysts amid weaker housing demand. "Yahoo Finance's" Dani Romero joins us with Deutsche Bank's take on the winners and losers from the homebuilder stocks. Hey, Danny.

DANI ROMERO: Hi, Rachelle. Well, the big hype around homebuilder stocks, it's not going anywhere. These stocks are going up. One Deutsche Bank-- one analyst, excuse me, from Deutsche Bank says, the winning streak isn't over just yet.


And the reason-- why are these big gains happening? Well, builders are price-takers. So they have been slashing home prices to drive up demand. And not only that, but they've also been offering incentives, which include rate buy-downs. And that looks really attractive when mortgage rates are above 6%.

So which ones are the winners and the losers? Well, let's start with the winners. These-- the reason that they are the winners is because these homebuilders have been trying different strategies to build up demand. So let's start with D.R. Horton. We have D.R. Horton, Meritage, Pulte Homes, Tri Pointe, and Toll Brothers.

For example, Toll Brothers. OK. They have shifted to affordable luxury. And not only that, but they have also ramped up their spec starts. So that means that unsold homes that have at least a foundation in the ground.

Pulte Group also follow suit and increasing their spec starts as well. And then if we look at Tri Pointe, the reason that's also been a big gainer is that they have expanded their footprint to Texas, the Carolinas, and potentially, Florida. So there could be some return on investment there.

Now let's move over to the losers. We've got NVR. We got Lennar. And the reason is because Deutsche Bank says that Lennar-- excuse me, NVRs management is letting cash pile up on their balance sheet. So there's a little bit of this somewhat detachment there.

For Lennar, the analysts believe that it will underperform compared to their peers like D.R. Horton. There are still two stocks that are on-- that have hold ratings, that is Taylor Morrison and KB Homes. And the reason is Taylor Morrison could face some pressure due to higher leverage, also some unfavorable business mix there too.

But again, KB Homes could also underperform compared to their peers D.R. Horton and Meritage. Rachelle.

RACHELLE AKUFFO: So Dani, for people who are looking at these homebuilder stocks, wondering if they should get into them, are there any risks ahead that they should be aware of?

DANI ROMERO: Rachelle, so if the US does tip into a recession, that could lead to job losses, and that could weaken demand. So that's just to give you some context. So on a company basis.

So if there could be some risks. Let's go into, for example, D.R. Horton. There could be some impacts there. The company has expanded their footprint in Texas. So that market could face some uncertainty if we do tip into a recession.

And for Toll Brothers. They have concentrated a lot on luxury. Yes, they've moved into affordable luxury but there could be some downturn there. But again, the story here in housing will be the tug-of-war between affordability and inventory, Rachelle.

RACHELLE AKUFFO: Well, certainly, as you laid out that not all homebuilders are created equal, everyone has to do their homework there. Thank you for laying that out for us. Our very own Dani Romero, thanks so much.