Since the pandemic, housing has been one of the strongest parts of the economy with home prices well above pre-pandemic levels. Housing has been in expansion mode since 2012 with the major factors being low rates, a growing economy, and low inventories.
The pandemic led to a surge in demand with people looking to move from urban areas to the suburbs or rural areas with remote work and schooling, while rates and inventories remained low, causing a spike in prices. In 2021, the housing market cooled off but still, the underlying fundamentals remain supportive. Further, some of the cost increases which led to a slowdown in activity have also improved such as lumber prices.
If we look at housing stocks, many homebuilders are starting to break out after being in consolidation mode. In addition, some of the leading areas of the housing market like building supply companies have been posting strong earnings and have already broken out to new highs.
This is even more impressive given that the market has been in the risk-off mode for much of the past month. However, the drop in longer-term rates is a positive tailwind for the sector. Here are 3 housing stocks that investors should watch:
Hovnanian (NYSE: HOV) reported very strong results that topped expectations. Most important was its margin expansion from 18% last year to 23% next year. This is an indication that the company is able to pass on cost increases. Also based on Hovnanian's forecast, it has a forward P/E of 5 which is very attractive relative to its peers and the broader market.
Louisiana Pacific (NYSE: LPX) is a manufacturer of building materials. This week, the stock broke out to new, all-time highs. The company is also cheap with a forward P/E of 10, and in its last quarter reported 54% sales growth and 147% earnings growth.
Skyline Champions (NYSE: SKY) is a maker of prefabricated homes. These tend to be cheaper for customers and cheaper to make. Given constraints in labor and materials, this type of solution is likely necessary to increase the number of available housing units. Thus, investors should look to buy the recent dip in Skyline's stock.