The housing industry has started showing signs of an imminent downtrend, with mortgage rates rising faster than experts predicted. The average contract rate for a 30-year fixed-rate mortgage crossed 5% last week, making customers pessimistic about the housing market. As a result, home sellers are being forced to reduce the asking prices for their homes.

Surging inflation, the possibility of aggressive interest rate hikes this year, and the continuing uncertainty surrounding the Russia-Ukraine war are the primary drivers of increasing mortgage rates. Joel Kan, a Mortgage Bankers Association economist, said, “Mortgage application volume continues to decline due to rapidly rising mortgage rates, as financial markets expect significantly tighter monetary policy in the coming months.” In addition, Western sanctions on Russia have intensified worldwide supply chain disruptions. This has also been leading to rising input costs, marring the growth prospects of housing companies.

Given this backdrop, we think it could be wise to avoid fundamentally weak housing stocks D.R. Horton, Inc. (DHI), NVR, Inc. (NVR), and Lennar Corporation (LEN), which are currently trading at premiums to their peers.

D.R. Horton, Inc. (DHI)

DHI in Arlington, Tex., operates as a homebuilding company in the East, North, Southeast, South Central, Southwest, and Northwest regions in the United States. It engages in the acquisition and development of land, and the construction and sale of residential homes.

On March 12, 2022, it was reported that 10  South Louisiana attorneys had sued DHI and Bell Mechanical Services, alleging that homes built by DHI post-2012 were not constructed to sustain “normal and typical Louisiana weather.” This might affect the company’s goodwill in the future.

DHI’s revenues increased 18.9% year-over-year to $7.05 billion for its fiscal year 2022 first quarter, ended Dec. 31, 2021. However, its cash and cash equivalents came in at $2.44 billion for the period ended Dec. 31, 2021, compared to $3.21 billion for the period ended Sept. 30, 2021.

In terms of trailing-12-month P/CF, DHI’s 40.98x is 294.3% higher than the 10.40x industry average. Over the past year, DHI has declined 22.6% in price to close Friday’s session at $70.83.

NVR, Inc. (NVR)

NVR operates as a homebuilder in the United States. The Reston, Va., company operates in two segments–Homebuilding and Mortgage Banking. It engages in the construction and sale of single-family detached homes, townhomes, and condominium buildings.

NVR’s homebuilding income increased 21.1% year-over-year to $392.01 million for the fourth quarter, ended Dec.31, 2021. However, its mortgage banking income decreased 43.7% year-over-year to $34.80 million. Its cash and cash equivalents came in at $2.55 billion for the period ended Dec. 31, 2021, compared to $2.71 billion for the period ended Dec. 31, 2020.

NVR’s 11.68x trailing-12-month P/CF  is 12.3% higher than the 10.40x industry average. Furthermore, its 1.40x forward P/S is 55% higher than the 0.91x industry average.

NVR missed EPS estimates in two of four trailing quarters. The stock has declined  9.6% in price over the past year to close Friday’s session at $4,293.89.

Lennar Corporation (LEN)

Together with its subsidiaries, LEN in Fontainebleau, Fla., operates as a homebuilder, primarily under the Lennar brand in the United States. It operates through Homebuilding East; Homebuilding Central; Homebuilding Texas; Homebuilding West; Financial Services; Multifamily; and Lennar Other segments.

LEN’s total revenues came in at $6.20 billion for its fiscal year 2022 first quarter, ended Feb.28, 2022, up 16.5% year-over-year. However, its net earnings were  $503.58 million, down 49.7% year-over-year, while its EPS came in at $1.69, down 47.2% year-over-year. In addition, its cash and cash equivalents were  $1.37 billion for the year ended Feb. 28, 2022, compared to $2.74 billion for the period ended Nov. 30, 2021.

In terms of trailing 12-month P/CF, LEN’s 10.67x is higher than the 10.40x industry average.

LEN missed EPS estimates in two of the four trailing quarters. The stock has declined 26.8% in price over the past year to close Friday’s trading session at $74.92.

DHI shares rose $0.05 (+0.07%) in premarket trading Monday. Year-to-date, DHI has declined -34.50%, versus a -6.21% rise in the benchmark S&P 500 index during the same period.

About the Author: Riddhima Chakraborty

Riddhima is a financial journalist with a passion for analyzing financial instruments. With a master's degree in economics, she helps investors make informed investment decisions through her insightful commentaries. More...

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