High demand, backlog of home orders favors builders in ’22

LOS ANGELES  — U.S. homebuilder stocks have outpaced the broader market this year, and analysts are bullish on the prospects for more gains in 2022, despite expectations of continued supply chain woes.

“Early returns from the winter suggest reasonable order strength thus far, which bodes well for the 2022 spring selling season,” BTIG homebuilding analyst Carl Reichardt wrote in a research note. He recently raised his 2022 earnings per share estimates for most of the 12 homebuilders he tracks, including KB Home and Lennar, citing expectations that builders will benefit from more sales next year.

The SPDR S&P Homebuilders exchange-traded fund is up 45% this year. Two of the biggest builders by homes sold, D.R. Horton and Lennar, are up about 52% and 46%, respectively. The benchmark S&P 500 index is on pace for a 23% gain.

The strong runup reflects investors’ confidence in builders’ prospects for capitalizing on a red-hot U.S. housing market that is underpinned by strong demand, still-low mortgage rates and a shortage of homes on the market.

Meanwhile, the supply chain bottlenecks have led big builders to build up a backlog of home orders that they won’t be able to deliver until next year.

The biggest problem homebuilders had in 2021 was being able to build homes fast enough to meet the demand during one of the hottest housing markets in decades.

“If there were no supply chain and no labor shortages we would be growing by double digits in terms of housing construction,” said Ali Wolf, chief economist at Zonda Economics, a real estate industry tracker. “Builders would sell more if they had more.”

The global supply chain disruptions, rising inflation and a shortage of skilled labor, led to construction delays and uncertainty that forced many big builders to pump the brakes on the number of homes they put up for sale. As a result, many builders have seen their backlog  swell.

The dynamic has helped dampen sales of new U.S. homes in 2021.

In October, new home sales hit a seasonally adjusted annual pace of 795,000, down 23% from a year earlier. In contrast, sales of previously occupied U.S. homes through the first 10 months of this year were up 11% from where they were in 2020, on pace for at least 6 million home sold, which would be the highest number in 15 years.

Homes nationally are selling within days of being put up for sale. In October, more than 80% of previously occupied U.S. homes sold after being on the market for less than a month.

“I don’t know how that changes in the near future, so it probably gives homebuilders maybe an extra shot or two on goal with getting buyers that they haven’t had in years past,” said Jay McCanless, a housing analyst at Wedbush Securities.