3 Cheap Housing Stocks to Buy as Demand Expected to Fly Through the Roof

After a big year, housing sales are expected to boom even further in 2021.
Anthony RussoJan 08,2021,22:16

The housing industry went through the roof in 2020 thanks to record-low-interest rates and a surge in relocations amid the coronavirus.

Amid the pandemic American workers were offered an opportunity to work from home; with many choosing to move to a less dense area. According to a 2020 survey by e-commerce payment startup Fast that polled 600 U.S. adults with remote jobs, 40% said they were weighing relocation to a less populated area, while 36% were mulling moving overall.

While the pandemic led the housing market to surge, one troubling trend remains: Although mortgage rates remain low, inventory has been scarce. As a result, new housing sales plunged 11% to a seasonally adjusted annual rate of 841,000 units in November, according to data from the U.S. Commerce Department.

At the end of November, there were just 1.28 million homes available for sale, down 22% year-over-year, according to CNBC.

Expected Boom in 2021

That said, 2021 projects to be even stronger for the housing market compared with last year. Online real estate firm Zillow (Nasdaq: ZG) expects housing sales to leap 22% in 2021, forecasting demand will skyrocket once the economy fully reopens.

“Annual home sales growth is expected to be the highest in almost 40 years as life and financial certainty brings more sellers into the market to meet the heavy demand and technology allows for faster connections with interested buyers,” the research report said.

Further, “Even so, home prices, mortgage rates and rents are likely to rise, bringing affordability challenges that must be faced.”

It also noted that the limited supply and high home prices will not deter homebuyers.

With another potential boom on the horizon in 2021, here are three housing stocks you may want to keep an eye on:

Lennar Corp (NYSE: LEN)

Market Capitalization: $22.41 billion

One stock you’ll want to consider is homebuilder operator Lennar.

The Miami-based firm, which mainly sells single-family attached and detached homes targets first-time, luxury, active adult, and move-up homebuyers, is coming off a strong fiscal fourth quarter.

Although Lennar’s revenues slipped to $6.4 billion from $7 billion, its earnings of $2.82 per share crushed estimates. A FactSet survey of 18 analysts expected the company to earn just $2.32 per share.

While Lennar experienced solid gains in 2020, the stock has fallen 9% to date since Dec. 24. That’s a good sign for investors looking to buy. Currently, the stock’s PE Ratio sits relatively cheap at 9.34.

Also, while it won’t wow investors, the stock's dividend yield currently sits at 1.36%.

According to Zacks Investment Research, Lennar’s earnings are forecasted to rise 8% in fiscal 2021.

D.R. Horton (NYSE: DHI)

Market Capitalization: $24.42 billion

Another cheap homebuilding stock that you’ll want to put on your radar this year is D.R. Horton.

Like Lennar, D.R Horton’s stock hit a rough patch last month. Since Dec.17, shares of D.R. Horton dropped 9%.

That stock plunge came even as Barclays analyst Matthew Bouley reiterated his buy rating and raised his price target to $95 from $81 on Dec. 18. Overall, Bouley is bullish on the homebuilding sector, noting that those stocks are only trading 1.4 times their 2021 tangible book value. He adds that "exceptional" pricing in 2021 will likely contribute to high gross margins that haven’t been seen since 2013.

Also, the company, which claims to be the largest homebuilder in the U.S. in terms of volume, is coming off a strong fiscal fourth quarter. In the quarter ending Sep. 30, D.R. Horton’s revenues leaped 27% year-over-year to $6.4 billion, ahead of the estimated $5.88 billion.

In addition, D.R. Horton raised its quarterly dividend by 14% to 20 cents. Currently, the stock’s dividend yield sits at 1.16%.

With a PE Ratio of just 10.45, now would be the time to place your bet on this stock as we move into 2021.

M.D.C. Holdings (NYSE: MDC)

Market Capitalization: $3 billion

Meanwhile, the best home builder to buy now is MDC, whose stock has dropped 10% since Dec. 22.

Earlier this week, MDC posted preliminary fourth-quarter results. Some key takeaways in the brief report included new home deliveries rising 7% to 2,564 and new home orders skyrocketing by 72% to 2,708.

While it won’t unveil its full results until February, the company could be on track to see solid sales going forward. According to Yahoo! Finance, citing three analysts, MDC is estimated to achieve sales growth of 11% in the fourth quarter and 18% for the full year.

Like D.R. Horton and Lennar, MCD’s stock is also cheap with its PE Ratio currently sitting at 9.64.

Those who are a fan of dividends will love this stock the most on our list. In November, MDC paid out a dividend of 40 cents to shareholders, a 21% increase from the previous quarter. Currently, the stock’s dividend yield sits at 3.33%.

While inventory and affordability could face some challenges, the housing industry should be poised for another big year in 2021.

More Economic Stimulus From the Dems?

One thing to consider: the Democrats just recently won two races in Georgia, meaning they have control of the Senate, and can pass another stimulus package on their terms. Also, mortgage rates could rise soon, as MarketWatch’s Jacob Passy pointed out earlier this week.

“While rates dropped this week, there are signs that they could soon rise,” he wrote.

He added, “Generally, mortgage rates track the movement of long-term bond yields, particularly the 10-year Treasury note TMUBMUSD10Y, 1.107%. On Wednesday, the 10-year Treasury rose above 1% for the first time since March, in response to the results in the runoff elections for the U.S. Senate in Georgia."

But given that there is now a 50-50 tie in the Senate, Democrats will be relying quite often on getting 50 votes, plus Vice President-elect Kamala Harris breaking the ties. One Democrat Senator could prove to be a problem for passing President-elect Joe Biden’s policies and that’s Joe Manchin of West Virginia.

Manchin, who comes across as more of a conservative Democrat, told The Washington Post today that he would "absolutely not" support passing $2,000 stimulus checks as the first priority. Instead, he thinks priority one centers around administering and distributing vaccines.

But yet again, that may not matter if there’s a little bit of bipartisan support on a potential bill. For instance, Republican Senator and Trump bootlicker Josh Hawley has pledged his support for $2,000 checks for working-class Americans. But that could also change once the Biden administration takes office.

That said, the three stocks I recommended above will all be great bets ahead of a potential new housing surge. All three are cheap but if you’re only looking to choose one, go with MDC for its attractive dividend yield.

CapitalWatch Disclaimer

CapitalWatch has no business relationship with any company whose stock is mentioned in this article. Information provided is for educational purposes only and does not constitute financial, legal, or investment advice.

Topics:Zillow, D.R. Horton, Lennar, MDC.