Will Rising Interest Rates Choke Off Homebuilding Growth?

In the past 60 days, mortgage rates have moved up 60 basis points from 3.35% to near 4%. While that may seem like a large move, it is important to remember that rates are coming off historic lows. Home affordability is still at historical highs, even with the recent move in rates, which is why the research team at Deutsche Bank A.G. (NYSE: DB) thinks volumes are unlikely to be materially affected by the move in rates.

In a recent research report, the Deutsche Bank analysts point out that with rising rates, those who qualify for a mortgage still are likely purchase a home, but they will not have the pricing flexibility they did a few months ago. Deutsche Bank has changed its ratings on some of the top names in the business. Here are their stocks to buy now.

D.R. Horton Inc. (NYSE: DHI) is the third largest holding in billionaire Stanley Druckenmiller’s portfolio. The company posted robust earnings per share results last quarter, with EPS coming in at $0.32, compared to $0.13 for the same quarter of last year. The Deutsche Bank price target is $27. The Thomson/First Call estimate is at $28. Investors are paid a small 0.6% dividend.

MDC Holdings Inc. (NYSE: MDC) is benefiting from the some of the strongest home prices in the nation, as they build primarily in the West. Deutsche Bank has a $46 price target, while the consensus estimate is $42.75. Investors are paid a 2.8% dividend.

Meritage Homes Corp. (NYSE: MTH) operations span across southern and western United States, including Arizona, Texas and California. Compared to a $0.15 loss per share in the last quarter of 2012, it turned the tables and posted a $0.32 per share profit in first quarter of 2013. Deutsche Bank has a $52 price objective, and the consensus is right in line at $52.

Ryland Group Inc.‘s (NYSE: RYL) recent acquisition of LionsGate Homes will allow it to gain control over the Fort Worth market, where LionsGate Homes currently operates 17 active communities. In addition, the acquisition will provide Ryland with approximately 843 lots and homes for future sales and 146 homes, which already have been sold. Deutsche Bank has a $49 price target. The consensus target for the stock is $49 as well.

Toll Brothers Inc. (NYSE: TOL) had a significant second quarter 2013, with a 57% increase in the dollar value of its home sales and a 36% increase in the number of units sold, the biggest quarterly increase in seven years. Deutsche Bank has a $39 target for the luxury building leader, while the consensus target is at $40.

TRI Pointe Homes Inc. (NYSE: TPH) is a small cap name that makes the stocks to buy list. The company is focused on building in southern and northern California. Deutsche Bank has a $21 target. The consensus is higher at $22.50.

One interesting item is the home builders warned investors off the stocks well before the market crashed. In 2006 and 2007, their analyst and investor conference calls were very bleak and warned of a prolonged slowdown. In contrast, home builder conference calls for the first quarter of 2013 have been very bullish and detailed strong demand, low rates and a rising stock market as major factors for optimism. So while rates are rising, a 4%, 30-year mortgage in the big scheme of things is still an outstanding bargain. Deutsche Bank analysts think their stocks to buy are as well.

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