Three Homebuilders For A Low Interest Rate Environment

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Interest rates for a 30-year fixed-rate mortgage for the fifth straight week, reaching the lowest level so far this year, according to Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC)’s weekly survey, which could give a boost to some homebuilders that are better positioned for a low-interest rate environment.

“We do not forecast mortgage rates, but if mortgage rates stay at or below current levels for the balance of the year, we believe it would be incrementally positive for several homebuilders,” write Sterne Agee analysts Jay McCanless and Annie Worthman.

Homebuilders: DHI, BZH, and MDC are top picks for low rate sales

Their top pick is D.R. Horton, Inc. (NYSE:DHI), which recently launched its ‘ultra-entry level’ Express Homes brand, could take advantage of low housing availability in southeast and east Texas during what is usually a strong season for home sales anyways. D.R. Horton’s customer mix is roughly 45% new and 55% move up, so the low interest rates could be a big boost to the younger home buyers that make up a big chunk of the company’s consumer base.

McCanless and Worthman’s second pick is Beazer Homes USA, Inc. (NYSE:BZH), whose community footprint they expect to expand over the next few years. Beazer also has a network of preferred mortgage lenders that has helped keep its cancellation rate close to 20% for the last six quarters, and its 60/40 mix of new buyers to move up customers again should position it well to take advantage of low interest rates.

Finally M.D.C. Holdings, Inc. (NYSE:MDC) has had two quarters of sequential growth and is on track for a third, a trend which McCanless and Worthman think will continue into FY2015. MDC Holdings’s sales are evenly divided, 50% entry level and 50% move up, but its geographic position is what has Sterne Agee’s analysts most excited. The US housing inventory is already low at about 5 months across the board, but MDC Holding’s six primary markets are even lower, with just 3.1 months’ worth of inventory on average.

Homebuilders: BZH and MDC undervalued relative to peers

Beazer Homes USA, Inc. (NYSE:BZH) and M.D.C. Holdings, Inc. (NYSE:MDC) have FY2014E price to book values of 0.97x and 1.1x respectively, compared to an industry average of 1.5x, while D.R. Horton, Inc. (NYSE:DHI) is valued slightly above its peers at 1.9x P/B. McCanless and Worthman give all three a Buy rating.

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