Homebuilder stocks move up in premarket ahead of NAHB Housing Market Index release – DHI, LEN, PHM, MDC

Homebuilding stocks are one of the only bright spots in Monday's premarket as investors await the release of the monthly NAHB Housing Market Index figure. Futures for the Dow, S&P 500 and Nasdaq are all down between 0.8% and 1% at the time of writing, so pessimism appears to be holding sway to start the week.

However, some of the largest homebuilders are on the opposite end of the sentiment. Lennar (LEN), the second largest homebuilder by market cap, has advanced 1.7% to $77.06 in Monday's premarket. DR Horton (DHI), PulteGroup (PHM) and MDC Holdings (MDC) are also slightly ahead.

The National Association of Home Builders is set to release September's figure at 14:00 GMT (10:00 am EST), and the consensus is forecasting a value of 48. This would be one point lower than August and would signal a moderately weakening home-building industry. The Housing Market Index is a poll of sentiment among homebuilders and it is normally seen as fairly predictive of movement in that market and the trajectory of the overall US economy.

NAHB Housing Market Index preview

The NAHB Housing Market Index has missed consensus for four straight months now – May through August – so it is somewhat surprising that there is any optimism to go around. The index began in 2022 in the mid-80s as the past two years have seen the index at its best readings in more than a decade. Beginning in May, however, the index began dropping sharply. There were plenty of stories earlier this year of homebuilders unable to finish houses on time because appliances and cabinets were backed up due to production shortfalls and logistics issues.

The index is now below the average of the past five years and seems to be heading quickly toward the reading at the onset of the covid pandemic when sentiment came in at a low of 30 before bouncing back.

Source: FXStreet

August then saw a largescale deviation. The market had been expecting 55 when the actual figure arrived at 49. Besides the past four readings, the NAHB Housing Market Index has actually missed consensus every single month in 2022, besides April when it was in line. This sure seems like a bad trajectory, but with interest rates for homebuyers now over 6% and likely trending higher, it makes sense that homebuilders are as a group fairly worried about the mid-term future.

Source: FXStreet

Homebuilding stocks are incredibly cheap

As a group homebuilding stocks are down nearly -33% year to date, while the S&P 500 is down a healthier -19%. This represents significant underperformance but has also helped these stocks garner interest from value investors looking for a bargain. Though housing is a famously cyclical business and thus probably warrants a cheaper multiple, homebuilder P/E multiples are truly astonishing. 

SPDR Homebuilders ETF daily chart versus SPX (orange)

DR Horton stock has a price-to-earnings (PE) ratio of 4.6. PulteGroup stock is trading for a PE of 4.4. Lennar has the highest PE of this group at 5.2, while MDC Holdings is trading for 3.3 times earnings.

Of course, you say, those are backward-looking multiples. While earnings are slated to pull back in 2023, most of these stocks are still seeing forecasts with robust cash flows ahead. MDC, for instance, is expected to report $9.37 a share this year and $7.37 a share in 2023. That would still give it a forward PE of 4. Analysts expect Lennar to report EPS of $14.87 in 2023, down 14.4% but still extremely profitable. DR Horton is expected to earn $13.61 in fiscal 2023 – a 20% decline YoY but still quite safe.

The market's low valuation for these stocks is a product of nearly everyone thinking the housing market is heading toward a recession if not the overall economy. Housing prices did rise too quickly over the past five years in the US, but this is mostly a product of there not being enough housing stock. Lower demand will bring prices down and reduce profits at the major homebuilders, but with supply so much lower than demand already it would seem that all four of these builders have little to worry about the long term.

For now, the market will focus on Monday's NAHB index and then on the August housing starts figure that arrives on Tuesday from the Census Bureau. The market is expecting 1.445 million new housing starts.