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Supply Chain Challenges Taper Homebuilder Growth

(C) Reuters. Supply Chain Challenges Taper Homebuilder Growth

Supply chain challenges are catching up with home builders, tapering their feverish growth. This week, both Lennar (NYSE:LEN) and D.R. Horton (DHI) reported a shortfall in new home deliveries for Q3, due to supply chain bottlenecks. I am neutral on LEN and DHI.

Here’s a quote from Stuart Miller, Executive Chairman of Lennar, “During the third quarter, our Company and the homebuilding industry as a whole continued to experience unprecedented supply chain challenges which we believe will continue into the foreseeable future. As a result, our third-quarter deliveries of 15,199 homes were about 600 homes below the low end of our guidance. Additionally, we are adjusting our fourth-quarter delivery guidance to, more or less, 18,000 homes, reflecting this supply chain constraint.”

Meanwhile, D.R. Horton expects its homes closed for the fourth quarter of Fiscal 2021 to be in a range of 21,300-21,700 homes, down from the previous range of 23,000-24,500 homes. Like Lennar, the company blames supply chain disruptions for the shortfall, including shortages and delivery delays in certain building materials and tightness and labor shortages.

Still, D.R. Horton now expects its homes closed for Fiscal 2021 to increase 24% to 25% from Fiscal 2020 to 81,300-81,700 homes, down from the previous range of 83,000-84,500 homes. (See D.R. Horton stock charts on TipRanks)

Demand is Still Strong

The slow-down in new home deliveries comes at a time demand for homes is strong. Recent home sales rose 1 percent in July to 708,000 units, while home prices increased at an annual rate of 19.1 percent.

New home sales and prices have remained strong even during the pandemic recession, thanks to ultra-low mortgages, growing mobility from cities to suburbs, and fears of inflation spinning out of control (homes are real assets, and therefore, good hedges against inflation).

More Headwinds Ahead

Strong demand for new homes and higher prices cannot move in tandem forever, as higher prices make new homes less affordable to new buyers. Meanwhile, bank regulations that usually require a 20 percent down payment make it more difficult for new buyers to get loans. Thus, there is a tapering demand for new homes. Moreover, the situation could become worse should the Federal Reserve begin tapering its bond-buying program this fall.

Wall Street’s Take

Wall Street has begun to sense both the supply chain challenges and the future headwinds, sending the shares of Lennar and D.R. Horton lower in the last three months. That’s a big reversal from the previous six months, when the two stocks outperformed the S&P 500.

Analysts’ Take

Analysts are still bullish on the sector. For example, the 8 Wall Street analysts following D.R. Horton rate its stock a Strong Buy, with an average D.R. Horton, Inc. price target of $113.63. With a high forecast of $129.00 and a low forecast of $101.00, the average price target represents a 29.2% change from the last price of $87.93.

The Bottom Line

The best days for homebuilders may be behind for this cycle, meaning that analysts may be too optimistic in their forecasts for further gains.

Disclosure: At the time of publication, Panos Moudoukoutas did not have a position in any of the securities mentioned in this article.

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Supply Chain Challenges Taper Homebuilder Growth

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