Plunging Mortgage Rates Could Drive Top Homebuilders Much Higher This Summer

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Wall Street has watched with mixed emotions as interest rates have plunged to the lowest levels in years, and mortgage rates, which track government rates, are down to the lowest levels since late 2016. In fact, a 30-year fixed rate mortgage is now priced at a very low 4.12%, and a 15-year fixed one is down to 3.625%.

In addition, applications to refinance mortgages jumped a whopping 47% from the prior week to the highest level since 2016, while mortgage applications to buy a home also perked up, increasing 10% after several weeks of lackluster showings as house shoppers finally responded to falling rates.

This is huge for the nation’s homebuilders, and with summer just a week away, which is typically, along with the late spring, the top selling season for the biggest U.S. homebuilders, the stocks of the top companies producing homes may be ready to explode.

We screened our 24/7 Wall St. research database looking for Buy ratings from Wall Street on the top homebuilders and found five companies that look like solid bets now for investors.

D.R. Horton

This is one of the highest volume builders in the United States. D.R. Horton Inc. (NYSE: DHI) is the largest public builder by closings in the country, delivering roughly 52,000 homes in 2018. It is positioned in 79 metropolitan markets in six major regions and develops single-family homes primarily for first-time and move-up buyers.

Approximately 80% of revenue comes from the Southeast, South Central and West regions, all of which continue to see very solid growth. The company also provides mortgage financing and title agency services to homebuyers.

Shareholders receive a 1.32% dividend. KeyBanc has an Overweight rating and a $52 price target, while the Wall Street consensus target is $47.40. The shares closed Thursday at $45.46.

KB Home

Some on Wall Street think this very well-known company could be acquired. KB Home (NYSE: KBH) is one of the largest U.S. homebuilders, with roughly 2% market share. The company builds single-family homes, townhomes and condominiums for first-time, move-up and active adult buyers. It is positioned in roughly 40 markets, with around 70% to 75% of revenues attributable to the West and Central regions. It also provides mortgage services through a joint venture with Nationstar.

Founded in 1957, and the first homebuilder listed on the New York Stock Exchange, the company has built nearly 600,000 homes for families from coast to coast. Distinguished by its personalized homebuilding approach, KB Home lets each buyer choose their lot location, floor plan, décor choices, design features and other special touches that matter most to them.

Shareholders receive just a 0.38% dividend. Barclays has an Overweight rating and a $29 price target. That compares to the $26.36 consensus target. The stock was last seen trading at $26.47 a share.

Lennar

This is a top pick at Merrill Lynch, and it is very well set up in the entry-level market. Lennar Corp. (NYSE: LEN) is the second largest public homebuilder by closings in the United States, delivering over 49,000 homes in 2018. The company is well positioned in 21 states in 49 markets in four major regions, targeting first-time, move-up and active adult buyers.

Lennar has diversified its core homebuilding operations with the addition of real estate investment and management, multifamily and single-family, and commercial real estate development in California. The company also owns a financial services business.

Lennar investors receive a 0.30% dividend. The $57 Merrill Lynch price target is a bit lower than the $58.00 consensus target. The stock closed trading most recently at $53.08.

PulteGroup

This is another top company with a wide product portfolio. PulteGroup Inc. (NYSE: PHM) is another of the largest public homebuilders in the nation, delivering over 23,000 homes in 2018. The company is positioned in approximately 50 markets in 26 states, targeting the first-time, move-up and active adult buyer groups.

PulteGroup primarily builds single-family detached homes, although it also constructs townhouses, condominiums and duplexes. The company owns a captive financial services business that provides mortgage financing, title, insurance and closing services.

The dividend yield here is 1.36%. KeyBank also has an Overweight rating on this builder, along with a price objective of $37. The consensus target price is $31.58, and shares closed Thursday at $32.50.

Toll Brothers

This company focuses more on the higher end of the market, and business remains good. Toll Brothers Inc. (NYSE: TOL) is a leading U.S. homebuilder with a focus on luxury suburban and urban markets. It operates in four distinct geographic segments, building homes catering to move-up, empty-nester, active-adult and second-home buyers.

Toll Brothers has entered into various joint ventures to develop land or high-rise construction projects. More than 45% of the company’s sales are attributable to the Northeast and Mid-Atlantic regions.

Shareholders receive a 1.17% dividend. Wells Fargo’s Buy rating comes with a $45 price target. The consensus target is $38.50, and shares closed at $37.64.

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These five stocks have solid upside to their respective targets. With a growing market, especially for first-home buyers, and the tailwind of the lowest interest rates in years, this could be a solid time for investors to add a small weighting in the industry, which at current trading levels, remains reasonable.