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Supply Chain Challenges Taper Homebuilder Growth By TipRanks


© Reuters. Supply Chain Challenges Taper Homebuilder Growth

Supply chain challenges are catching up with home builders, tapering their feverish growth. This week, both Lennar (NYSE:) and D.R. Horton (DHI), reported that there was a shortage in home deliveries during Q3, due to supply chain problems. LEN/DHI remain neutral.

Stuart Miller (Executive Chairman of Lennar), said, “During our third quarter, we Company and the whole homebuilding industry continued to face unprecedented supply chain challenges that will likely continue in the future.” This resulted in our third quarter delivery of 15,199 homes, which was 600 less than the guidance. This supply chain constraint has led us to adjust our fourth-quarter delivery guidelines to 18,000 homes.

D.R. D.R. Horton anticipates that its homes will be closed in the fourth quarter fiscal 2021. This is down from previous levels of 23,000-24,000. Lennar is also a victim of supply chain disruptions. The shortfall can be attributed to shortages or delays in delivery for certain materials as well as tight labor markets.

Still, D.R. Horton anticipates closing its homes for Fiscal 2021, an increase of 24%- 25% over Fiscal 2020 to 81.300-81.1700 homes. This compares to the range 83,000-84,000 homes. D.R. Horton stock charts on TipRanks)

Demand is Still Strong

The slow-down in new home deliveries comes at a time demand for homes is strong. Recently, new home sales increased 1 percent to 708,000 homes in July. Home prices rose at an annual rate 19.11%.

Due to low mortgage rates, increased mobility and concerns of inflation spiralling out of control, new home sales have been strong even in the recession.

More Headwinds Ahead

Strong demand for new homes and higher prices cannot move in tandem forever, as higher prices make new homes less affordable to new buyers. Bank regulations usually require 20% down payments to make loans more challenging for buyers. Therefore, the demand for new houses is decreasing. The Federal Reserve could make matters worse if it begins to reduce its bond-buying program in the fall.

Wall Street’s Take

Wall Street has begun to sense both the supply chain challenges and the future headwinds, sending the shares of Lennar and D.R. Horton fell in three months. This is a significant change from six months ago, when both stocks had outperformed each other.

Analysts’ Take

Analysts are still bullish on the sector. D.R. Horton rates its stock as a Strong Buy with an average D.R. Horton, Inc. has a price target of $113.63. Horton, Inc. price target of $113.63 is a combination of a high forecast at $129.00 and low forecasts of $101.00. The average price target represents an increase of 29.2% from last year’s price of $87.93.

The Bottom Line

The best days for homebuilders may be behind for this cycle, meaning that analysts may be too optimistic in their forecasts for further gains.

Disclosure: Panos Moudoukoutas had no position at the time this article was published.

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