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Goldilocks Conditions for the Homebuilders?

With the 10-year treasury falling to levels last seen in 2016, that means that mortgage rates have also fallen under 4% again to multi-year lows.

Additionally, the job market remains strong with unemployment under 4%. The consumer feels confident and that usually means that they will look to make big purchases, like homes.

Could low mortgage rates and a strong job market be the perfect combination for a boom for the homebuilders?

And if so, where should investors be looking?

The Homebuilder Stocks are Cheap

Despite the industry seeing a 30% gain on the year, thanks to the stocks being hit hard in December 2018, they are still cheap.

Of the five homebuilders highlighted on the podcast, all of them are trading under 10x earnings. Other than retail and energy, it’s hard to find another industry as cheap.

But Are They Buys?

1.       KB Home (KBH - Free Report)trades with a forward P/E of just 9.8 yet earnings are expected to rise 56% this year. In the second quarter, a weak coastal California market was countered by stronger orders in Denver and Houston. Will lower mortgage rates help to turn California around?

2.       PulteGroup (PHM - Free Report) trades with a forward P/E of just 9.2. Orders were up 7% in the second quarter as first-time home buyer orders surged 30%. However, active-adult concepts declined 7% as those buyers were more cautious coming out of the housing and stock market weakness of 2018.

3.       M/I Homes, Inc. (MHO - Free Report) is even cheaper, with a forward P/E of just 8.3. It also doesn’t have California exposure but is still fighting the industry-wide issue of higher incentives and discounting. However, in the second quarter, the company said those incentives have not gotten worse.

4.       Lennar Corp. (LEN - Free Report) saw elevated selling incentives and higher land and labor costs which ate into margins. The higher-end coastal communities in California were sluggish. It too is cheap with a forward P/E of 9.3 but earnings are expected to fall 16% in fiscal 2019.

5.       Toll Brothers Inc. (TOL - Free Report) is about to report its third-quarter results on Aug 20. In the second quarter, it saw higher selling incentives and also had west coast issues. Orders dropped 45% in California in Q2 but mortgage rates have fallen significantly since the spring. Shares are trading at just 9.1x forward earnings.