3 Homebuilding Stocks to Avoid as Housing Starts Slump

The demand for new houses and renovations rose significantly amid the pandemic, with residential construction hitting a 15-year high in March 2021. However, in July building activities took a…

step back, owing to the continuing supply constraints that construction companies face nationwide. Also, the housing industry has been adversely affected by surging inflation rates, which have raised housing prices substantially.

In July, housing starts declined 6% from the prior month for both single-family and multifamily projects. Supply constraints and elevated input costs are the major factors that led to the slump in the housing industry. According to senior economist George Ratiu at Realtor.com, “Builders pulled back on housing starts, wary of overcommitting on final new home prices in the face of volatile costs for land, materials and labor.”

So we think given the current volatility in the housing market, fundamentally weak stocks PulteGroup, Inc. (PHM – Get Rating), KB Home (KBH – Get Rating), and Meritage Homes Corporation (MTH – Get Rating) are best avoided now.

PulteGroup, Inc. (PHM – Get Rating)

PHM is primarily engaged in the home building business in the United States. The Atlanta, Ga., company acquires and develops land for residential purposes, and constructs housing on such land. It offers various home designs, including single-family detached, townhouses, condominiums, and duplexes.

On July 26, PHM announced a strategic plan  to build single-family rental projects in select PHM communities. The company expects to design and build approximately 7,500 new homes over the next five years. However, PHM is not expected to benefit immediately because the company plans to execute  the project over an extended term.

For the second quarter, ended June 30, PHM’s home sale revenues increased 31% year-over-year to $3.24 billion. However, its cash flow from operating activities declined 46.5% from its year-ago value to $432.07 million in the  six months ended June 30.

PHM has slumped 3% in price over the past five days to close yesterday’s trading session at $52.71. The stock has gained marginally over the past month.

Under POWR Ratings, PHM is ranked #5 among the 24 stocks in the Homebuilders industry. Get PHM ratings for Growth, Quality, Momentum, Value, Sentiment, and Stability, here.

KB Home (KBH – Get Rating)

KBH operates as a homebuilding company in the United States. The Los Angeles-based concern builds and sells various homes, including attached and detached single-family residential homes, townhomes, and condominiums, primarily for first-time, first move-up, second move-up, and active adult homebuyers. It has operations in Arizona, California, Colorado, Florida, Nevada, North Carolina, Texas, and Washington.

On August 20, KBH announced the grand opening of Spring Creek, a new, single-family home community in Spring, Texas. The company has been opening several new communities over the past couple of months. However, the housing market is currently dealing with supply constraints and elevated material costs, which could…

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