It’s been a rough few years for the housing sector.
Ever since the Fed raised interest rates to multi-decade highs in 2022/2023, both housing starts and existing home sales have fallen off a cliff in the U.S. Housing starts peaked at 1.82 million in April 2022; they dipped as low as 1.28 million this May, a 30% dropoff. Existing home sales have fallen even further, from a 6.6-million-unit peak in January 2021 to a 3.9-million-unit nadir this June – a 41% haircut.
Housing-related names, including homebuilder stocks, have not experienced a similar decline – they’re actually up quite a bit since both early 2021 and early 2022. But in the last year, the industry’s ongoing malaise has finally taken a toll on share prices: Homebuilder stocks are down 3.1% during that time, worse than any major S&P 500 sector outside of healthcare.
And yet, the sector is not undervalued. In fact, on a forward price-to-earnings basis (31), it’s the most expensive of the 11 S&P sectors right now. It’s also the second-most expensive on a price-to-sales basis (4.3) and about middle of the pack in price-to-book value (2.4).
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That’s what happens when a sector’s stocks nearly double at a time when sales are down anywhere from 30% to 40%. However, with the Fed seemingly about to start slashing rates again (the CME Group’s FedWatch tool puts the chances of a 25-basis point cut next month at 85% as of this writing), it’s possible a pickup in housing sentiment – if not sales – is imminent, regardless of value.
With that in mind, I was curious as to whether there are housing-related stocks that are still undervalued and perhaps poised for a bigger bump in the coming months. Here are three big names that stood out.
3 Undervalued Homebuilder Stocks
Toll Brothers (TOL)
Forward P/E: 10.1
Price/Sales: 1.3
Price/Book: 1.6
PulteGroup (PHM)
Forward P/E: 11.8
Price/Sales: 1.5
Price/Book: 2.1
D.R. Horton (DHI)
Forward P/E: 13.3
Price/Sales: 1.5
Price/Book: 2.1
Of those three high-profile homebuilders, only Toll Brothers is expected to grow sales and earnings this year, and both are by razor-thin (less than 1%) margins. Things aren’t supposed to get much better in 2026, though the current estimates likely aren’t factoring in what substantial cuts to the federal funds rate could do to stubbornly high mortgage rates and, by proxy, confidence among prospective homebuyers.
The 30-year mortgage rate has been north of 6% since September 2022. Even the three Fed rate cuts – by a total of 100 basis points – late last year failed to lower mortgage rates much. To get them back below 6%, never mind to 2020/early 2022 levels, will require some significant cutting on the part of the Fed.
So, while I do expect housing stocks to get a decent short-term bump in the coming weeks and months in anticipation of – and, hopefully, in reaction to – the Fed starting to slash rates again, I don’t expect that bump to last, given the lack of intermediate-term growth prospects and lack of value.
Case in point: last July through mid-October, the SPDR S&P Homebuilders ETF (XHB) was up 28% prior to and in the wake of the Fed’s big 50-basis-point cut in mid-September. The fund is off more than 8% since, at a time when the S&P is up more than 9%.
Bottom line: homebuilder stocks aren’t growing, and while a few big names like the ones I mentioned are undervalued by traditional measures, their negligible growth prospects over the next 18 months, at least, make them unappetizing, at least in the intermediate to long term.
If you have more of a trader’s mentality and want to try and nab a quick 10-20% gain in the coming months on the prospect of the Fed reintroducing rate cuts, any of the three names mentioned above stand a fair chance of delivering it. But if you’re investing for beyond just the next two to three months, I’d steer clear of housing-related plays, at least for now.
For stocks with far more appealing combinations of growth and value, check out my Cabot Value Investor advisory. Employing a “growth at value prices” mentality, this year my Cabot Value Investor stocks have delivered a return of better than 12% – ahead of the 10% return in the S&P 500 and easily outpacing the 7.8% return among traditional value stocks.
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