Skip to Content
US Videos

Homebuilders Set to Benefit as Demand Grows

We don't see any economic moats for homebuilders under our coverage, but D.R. Horton has great positioning, and Toll Brothers is undervalued.

Mentioned: ,

Brian Bernard: Although new-home production has improved each year since the 2009 trough, we have yet to return to a normalized level of production, which has created significant pent-up demand. We see a maturing millennial population, a gradual improvement in financial health, and execution of postponed events, such as marriage and childbirth as powerful catalysts for new-home construction.

Homebuilding is a very fragmented and competitive industry with limited barriers preventing competitors from replicating successful strategies and entering new markets. As such, we do not believe any of the homebuilders under our coverage possess economic moats. Still, all of these builders will benefit from growing demand.

We think D.R. Horton is best positioned to capitalize on growing demand due to its large geographic footprint and broad product portfolio that targets multiple demographics. The company also utilizes a robust speculative strategy that effectively competes with existing home sales. D.R. Horton is one of the only public builders focused on delivering lower-priced product to true entry-level buyers, which we think is an underserved market. Higher growth expectations seem baked into the stock price, though, as the shares currently seem overvalued.

Toll Brothers is currently the most undervalued name under our coverage. We do expect the company to benefit from a strengthening recovery, but there are some risks worth mentioning. First, Toll Brothers is a luxury builder with an average selling price in excess of $800,000, so the company does target a limited demographic, and we don't think Toll will fully participate in the continued recovery. Second, the company is expanding for-sale high-rise and for-rent operations which can be more profitable, but also riskier.

Brian Bernard does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.