Meritage Homes seems to be the analysts' favorite. Michael Rehaut of J.P.Morgan gives the stock an overweight rating as well, along with Ryland, KB Homes (KBH - Get Report), Beazer (BZH - Get Report), Taylor Morrison and M/I Homes (MHO). Rehaut thinks there is still upside potential in the builders and believes the housing industry fundamentals will continue to improve over the next 18 months. He is aware of the pullback in builder stocks when rates rise and noted that this has happened six times since 1987. However, the group strongly rebounds after the rising rate period. It is this rebound that causes Rehaut to be positive. In addition, he points to the supply and demand picture, which Hackel also wrote about.
Both analysts say that the U.S. market needs over 900,000 new homes a year. Approximately 300,000 are demolished each year and the current level of new housing starts is below 30-year averages. Builders have been reluctant to build due to the number of distressed homes in the market. Why buy a new home when you can get a bargain-priced used one? The number of distressed homes has declined 15% in 2012 and that is helping to create the current shortage. Typical demand for U.S. households is about 850,000 a year, so you can see the shortage of new homes in the market.
Another positive point is that order rates are rising and the builders don't book these transactions until the homes are actually closed. Ryland has a 45% order growth outlook for 2013 and Meritage's outlook is for 28% order growth. The more solid homebuilders were also able to take advantage of the crisis to do land grabs and pick up land at fire sale prices. If the Obama administration begins to push the banks to give more mortgages, then the homebuilders will continue to benefit. It seems the only thing that could hold the builders back now is how tight the banks remain on those strict mortgage requirements.