The Zacks Analyst Blog Highlights: Lennar, D.R. Horton, PulteGroup and Toll Brothers

For Immediate Release

Chicago, IL – July 6, 2021 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: Lennar Corporation (NYSE:LEN) LEN, D.R. Horton, Inc. DHI, PulteGroup (NYSE:PHM), Inc. PHM and Toll Brothers (NYSE:TOL), Inc. TOL.

Here are highlights from Friday’s Analyst Blog:

Construction Spending Slips in May, Owing to Tepid Housing

Spending on U.S. construction projects fell in May. Weakness in non-residential construction and public projects has more than offset a modest gain in private homebuilding.

Spending on construction projects in the United States slipped 0.3% in May from the prior month after inching up 0.1% in April, according to a report released by the Commerce Department on Jul 1. The May figure missed analysts' expectations by 160%. On a year-over-year basis, overall spending on construction projects in the nation advanced 7.5%, with notable growth of 13.2% in private spending offset by an 8.7% drop in public outlays.

Spending on public construction projects dipped 0.2% in May, after decreasing 0.6% in April. Spending on government projects also declined 8.7% from a year ago, weighed down by lower capital outlays from the administration owing to falling tax revenues.

Meanwhile, private construction spending was down 0.3% for the month from April outlays, thanks to a 1.1% drop in private non-residential construction. This marks the sixth consecutive quarter of decline in investment in non-residential categories. Low spending on lodging and manufacturing was the main culprit.

Slowing Housing: A Culprit

Investment in private residential construction showed meager growth of 0.2% for May, aided by a 0.8% increase in single-family homebuilding. Apartments and other multifamily construction spending remained flat. Over the past year, spending on private housing construction was up 28.7%, backed by a 46.1% increase in investment in single-family construction and 25.6% in new multifamily.

Housing has been one of the few markets that displayed stern resilience to the economic impacts of the coronavirus pandemic. This industry has experienced a strong recovery fueled by the rising need for more work-at-home space and record low mortgage rates. However, rising costs associated with building materials — especially framing lumber — are restricting builders' ability to speed up construction.

Last month, a report from the Commerce Department showed that permits for future home construction dropped to a seven-month low. Although housing starts rose 3.6% to a seasonally adjusted annual rate of 1.572 million units for May, housing completions slipped for the month.

Also, sales of new U.S. single-family homes — a leading housing market indicator based on signed contracts, not closings — declined to a one-year low in May, marking the second-straight monthly decline. Furthermore, sales of existing homes — which account for the bulk of U.S. home sales — dropped for the fourth straight month in May (read more: Does Declining Home Sales Signal End of COVID-Led Housing Boom?).

Although demand remains strong, challenges like inventory shortage are prevailing in the U.S. real estate market. Also, rising material costs are quite a challenge and are creating pressure on margins for homebuilding companies like Lennar, D.R. Horton, PulteGroup, Toll Brothers and others. Record-high prices have been pushing potential buyers away despite a low borrowing rate environment.

Strong Economic Fundamentals Raise Hope

Before becoming bearish, investors should note that economic fundamentals are still strong, given rising consumer confidence, and a solid GDP and job market.

Demand for higher-priced accommodations amid the COVID-19 pandemic has been driving the housing market. Sales of homes — priced $750,000-$1 million — jumped 178% in May, according to the National Association of Realtors.

Mortgage rates declined this week, with the key 30-year loan slipping back below the 3% mark as the economic recovery from the pandemic recession remains robust. Markedly, the U.S. GDP expanded 6.4% on an annualized basis for first-quarter 2021.

On a further encouraging note, the Federal Reserve recently raised its 2021 real GDP forecast to 7% from 6.5%. Also, the Fed now envisions unemployment rate to be 4.5% for 2021, indicating a decline from the level of 5.8% in May 2021.

A low interest rate environment, lower unemployment rate, massive vaccination drive and declining coronavirus cases will likely drive the already-booming housing market going forward. The number of Americans seeking unemployment benefits dropped again last week to the lowest level since the pandemic hit last year, thereby depicting that the job market and broader economy are rebounding rapidly from the coronavirus recession.

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