Investing.com -- Sentiment among US homebuilders is “decidedly negative” during the cold winter season, UBS analysts said, but housing fundamentals remain strong, presenting potential opportunities for investors.
In the final quarter of the calendar year 2022, homebuilder and building product/distributor stocks covered by UBS lagged behind the broader market, with homebuilders down by 23% and building product distributors by 16%, compared to a 2% gain for the S&P 500.
Mortgage rates have spiked, influenced by a robust September payroll report and expectations of inflationary policy under the Trump administration. Despite this, UBS has adopted an increasingly constructive stance on the sector.
“In our view, market sentiment has now approached peak pessimism, particularly for the homebuilders, which has historically translated into buying opportunities for investors,” analysts led by John Lovallo said in a note.
“Additionally, we believe underlying housing fundamentals remain firmly intact and that the public builders are increasingly well-positioned to gain share from smaller, private competitors, while continuing to capitalize on tight existing home inventory across most of the country,” they added.
UBS has recently upgraded PulteGroup (NYSE:PHM) stock from Neutral to Buy, though they acknowledge that the near-term trajectory “could be choppy”
The fourth quarter of 2022 presented challenges for homebuilders, with mortgage rates rising from approximately 6.25% to 7.10%. While affordability remains an issue for buyers, public builders have an advantage due to their ability to offer mortgage rate buydowns.
Elevated incentive activity was noted in the quarter, which may impact gross margins for the fourth quarter of 2022 and the first quarter of 2025. However, UBS’s gross margin forecasts for 2025 and 2026 are conservative, and they expect builders to manage higher rate environments effectively as they have done in recent years.
Management commentary and financial targets are anticipated to be cautious due to the uncertain outlook for the Spring selling season. Nonetheless, the bank views the group’s valuation as “undemanding” at current levels.
“In fact, according to the UBS HOLT team’s proprietary valuation metrics, the builders are nearly as dislocated as they have been over the last 10 years vs the broader market and at levels that have historically resulted in strong shareholder returns,” analysts added.
Regarding building products and distributors, mixed results are expected for the fourth quarter of 2022. UBS forecasts slight year-over-year growth in repair and remodel activities for 2025, bolstered by an uptick in existing home sales and pent-up demand.
A recent UBS survey supports this outlook, with 58% of respondents planning home improvement projects in the next 12 months.
While consumer debt and potential tariffs pose challenges for 2025, the building products and distribution industries are set to play a significant role in rebuilding efforts following the devastating Louisiana fires. Elevated mortgage rates may, however, continue to affect homeowner mobility and the recovery pace in existing home sales.