2 Homebuilders to Buy as Household Formation Rates Are Improving

The United States housing market was red hot in 2021, with property sales on track to reach their best level in 15 years. According to the Federal Housing Finance Agency, average property prices increased some 20% in the third quarter, versus to the same period last year. And an increase in household formation caused housing demand to grow faster than supply, driving prices higher.

The work-from-home trend boosted the demand by millennials for single-family homes, expediting their transition from renting to owning houses. In addition, housing formation was impacted significantly in 2020 with the emergence of COVID-19, with young adults deferring their plans to move out of their parent’s homes. So 2021, a year of recovery, saw a significant jump in household formation. Roommates moving out with an increase in their incomes in an improving job market is another reason behind the increase in the household formation rate. This trend is expected to continue.

Furthermore, housing prices are up more than 53%, with the median home price standing at $353,900. But household income is up 40%, and mortgage rates are down to t 3.07%, implying better affordability than historical averages. So, we think it could be wise to bet on two fundamentally-sound homebuilder stocks NVR Inc. (NVR) and M/I Homes Inc. (MHO).

NVR Inc. (NVR)

NVR in Reston, Va., is a homebuilder in the United States. The company operates through two segments: Homebuilding and Mortgage Banking. It primarily builds and sells single-family detached houses, townhomes, and condominium complexes under the Ryan Homes, NV Homes, and Heartland Homes brands.

In November 2021, NVR's board of directors authorized a $500 million buyback of its outstanding common stock. According to the company, the authorization is a continuation of its stock repurchase program that began in 1994 and is in line with NVR's strategy of maximizing shareholder value.

For the third quarter, ended Sept. 30, 2021, NVR's revenue increased 21.7% year-over-year to $2.34 billion. Its operating income grew 45.2% from its year-ago value to $407.94 million over this period. The company's net income increased 29.5% year-over-year to $332.08 million, while its EPS surged 32.8% from the prior-year quarter to $86.44 over this period.

NVR is expected to witness 24.3% revenue growth in its fiscal 2021. In addition, its EPS is estimated to increase 42.9% year-over-year to $328.84 in fiscal 2021. NVR's stock has gained 37.1% in price over the past year and 14.5% over the past six months.

NVR's POWR Ratings reflect this promising outlook. The company has an overall B rating, which translates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 distinct factors, each with its own weighting.

NVR is also rated an A grade for Momentum and a B for Quality. Within the A-rated Homebuilders industry, it is ranked #6 of 23 stocks. To see additional POWR Ratings for Stability, Sentiment, Growth, and Value for NVR, click here.

M/I Homes Inc. (MHO)

M/I Houses, Inc. in Columbus, Ohio, and its subsidiaries, construct single-family homes in the states of Ohio, Indiana, Illinois, Michigan, Minnesota, North Carolina, Florida, Texas, and Tennessee. Northern Homebuilding; Southern Homebuilding; and Financial Services are the company's operational segments. Under the M/I Homes brand, it designs, builds, promotes, and sells single-family homes and attached townhouses to first-time, millennial, move-up, empty-nester, and luxury customers.

During the third quarter, ended Sept. 30, 2021, MHO's revenue increased 6.7% year-over-year to $904.32 million. Its operating income increased 30.3% from its year-ago value to $125.22 million. The company's net income increased 23.8% year-over-year to $91.02 million, while its EPS rose 20.7% from the prior-year quarter to $3.03.

MHO’s EPS is estimated to increase 51.6% year-over-year to $12.84 in its fiscal 2021. In addition, its revenue is expected to increase 20.7% in fiscal 2021 and 16.9% in fiscal 2022. Furthermore, its shares have gained 23.9% in price over the past year.

MHO's strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, which equates to Buy in our POWR Ratings system. MHO has an A grade for Momentum and a B for Value and Sentiment. In the Homebuilders industry, it is ranked #9.

In total, we rate MHO on eight distinct levels. Beyond what we have stated above, we have also given MHO grades for Stability, Growth, and Quality. Get all the MHO ratings here.

NVR shares were trading at $5,452.00 per share on Wednesday afternoon, down $44.83 (-0.82%). Year-to-date, NVR has declined -7.73%, versus a -3.95% rise in the benchmark S&P 500 index during the same period.

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.

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