Solid Demand, Backlog of Home Orders Favors Builders in ’22 | Business News

By ALEX VEIGA, AP Business Writer

LOS ANGELES (AP) — U.S. homebuilder stocks have outpaced the broader market this year, and analysts are bullish on the prospects for more gains in 2022, despite expectations of continued supply chain woes.

The SPDR S&P Homebuilders exchange-traded fund is up 45% this year. Two of the biggest builders by homes sold, D.R. Horton and Lennar, are up about 52% and 46%, respectively. The benchmark S&P 500 index is on pace for a 23% gain.

The strong gains reflect investors’ confidence in builders’ prospects for capitalizing on a red-hot U.S. housing market that is underpinned by strong demand, still-low mortgage rates and a shortage of homes on the market.

Meanwhile, the supply chain bottlenecks have led big builders to build up a backlog of home orders that they won’t be able to deliver until next year.

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Solid Demand, Backlog of Home Orders Favors Builders in ’22 | Business News

“Early returns from the winter suggest reasonable order strength thus far, which bodes well for the 2022 spring selling season,” BTIG homebuilding analyst Carl Reichardt wrote in a research note. He recently raised his 2022 earnings per share estimates for most of the 12 homebuilders he tracks, including KB Home and Lennar, citing expectations that builders will benefit from more sales next year.

The biggest problem homebuilders had in 2021 was being able to build homes fast enough to meet the demand during one of the hottest housing markets in decades.

The global supply chain disruptions, rising inflation and a shortage of skilled labor, led to construction delays and uncertainty that forced many big builders to pump the brakes on the number of homes they put up for sale. As a result, many builders have seen their backlog of home orders they have yet to deliver on swell.

The dynamic has helped dampen sales of new U.S. homes in 2021. In October, new home sales hit a seasonally adjusted annual pace of 795,000, down 23% from a year earlier. In contrast, sales of previously occupied U.S. homes through the first 10 months of this year were up 11% from where they were in 2020, on pace for at least 6 million home sold, which would be the highest number in 15 years.

“If there were no supply chain and no labor shortages we would be growing by double digits in terms of housing construction,” said Ali Wolf, chief economist at Zonda Economics, a real estate industry tracker. “Builders would sell more if they had more.”

Builders are still dealing with supply chain bottlenecks and higher prices for garage doors, windows, plumbing fixtures and other building materials.

During a recent conference call with analysts, builder Taylor Morrison Home said it continues to see random building product shortages across the country and anticipates they may continue next year.

Lumber futures prices soared to an all-time high $1,670.50 per thousand board feet in May, a twofold increase from a year earlier, reflecting strong demand for new construction and home remodeling, and pandemic-related problems limiting production. It then dropped to $456.20 in August, but has been surging since and is now back above $1,100, according to FactSet.

Still, the housing market demand trends, especially the low inventory of homes for sale, bode well for builders heading into next year.

Homes nationally are selling within days of being put up for sale. In October, more than 80% of previously occupied U.S. homes sold after being on the market for less than a month.

“I don’t know how that changes in the near future, so it probably gives homebuilders maybe an extra shot or two on goal with getting buyers that they haven’t had in years past,” said Jay McCanless, a housing analyst at Wedbush Securities.

That’s one reason the analyst is bullish on more stock price gains for the 14 homebuilders he tracks.

“I’m very comfortable and optimistic with the group heading into next year,” he said. “And certainly our price target suggests there’s room for growth above the current prices.”

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