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1 Homebuilder to Buy for the Long Term

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Homebuilders are enduring a rough 2022, but heres one that could emerge from the downturn.

An unwelcome combination of major supply chain challenges and rising mortgage rates have derailed the stocks of homebuilders like Lennar Corporation (LEN -1.13%) (LEN.B -1.12%) in 2022. Periods where mortgage rates are rising have historically been bad for homebuilders as it makes homeownership more expensive and therefore dampens demand. Lennar is down 30% from its 52-week high.

While these are indeed serious headwinds, the drastic undersupply of housing in the United States and demand for housing from new and first-time homebuyers like millennials and zoomers are long-term growth drivers for homebuilders. Investors are well served by seeing past short-term challenges to take advantage of long-term secular trends, and this looks like one of those situations.

Housing shortage hits home

Most readers probably have a friend or relative who is house hunting and has horror stories about traipsing to dozens of open-houses and putting in offer after offer only to be outbid by one of the scores of other would-be buyers. Many readers may even be experiencing this tight market themselves. It's not just anecdotal, the data shows that there just aren't enough houses right now for everyone who would like to buy one. In late 2021, a study found that the United States was short a whopping 5 million homes as 12.3 million new households were formed over the past decade, but only 7 million houses were built in that time . Even worse for would-be buyers, the study shows that the supply gap is increasing over time. The National Association of Realtors says that 1.9 million people who want to buy a home will be shut out of the market this year.  With demand high and existing homes not coming on to the market at a fast enough pace, new builds from Lennar and its peers are going to be as much in need as ever. 

Image source: Getty Images.

Focus on the sun belt

Lennar is focused on an in-demand group of markets, with an emphasis on the Sun Belt. The company is the leading developer in many of Florida's hottest markets, like Naples and Sarasota. Florida has seen a large influx of new residents from other parts of the country over the last several years for a variety of reasons. 

Lennar recently entered the Alabama market in Huntsville and the Alabama coast. Huntsville benefits from affordability, a growing local economy, and favorable weather, while the Alabama coastal market boasts these same attributes along with the added attraction of the Gulf Coast. Lennar also highlighted its strong positioning in Atlanta, the Carolinas, and Texas on the call. Texas has seen an influx of demand and population growth thanks to no state income taxes and a bevy of companies ranging from Tesla to Google moving operations to the state. Lennar also highlighted its Phoenix and Las Vegas markets as benefiting from migration from California. These are all growing markets with increased housing demand thanks to the strengthening of local economies and influxes of new residents. So Lennar is in many of the places a homebuilder should be targeting. 

Fixer-upper valuation

Last but not least, investors can buy shares of Lennar at some of the cheapest multiples out there. Lennar may build some beautiful homes, but after a 33% decline from its 52-week high, shares are valued like a fixer-upper. Lennar trades at under 5 times next year's earnings. This valuation is drastically cheaper than the average multiple of the S&P 500 and the broader market as a whole. Not only is Lennar cheap on an earnings basis, but it trades at less than the total of one year of its annual sales. Additionally, Lennar sports a 1.9% dividend yield and recently authorized a share buyback program of up to $1 billion.

In conclusion, while Lennar's current situation is challenging, these challenges are already priced into the inexpensively valued shares, and the long-term picture looks more promising. 

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