Homebuilder Analyst Who Accurately Predicted 2022 Now Forecasts Strength Ahead

An analyst who called a grim start for homebuilding stocks this year as well as their rebound in recent months is confident that the group will stay strong in 2023. The analyst cites several reasons for this, including the fact that interest rates are expected to stay low and that the U.S. economy is expected to continue to grow.

According to Kenneth Zener at Keybanc Capital Markets, the homebuilding sector is expected to fare better than the S&P 500 Index next year. The group fell harder than the overall market earlier this year, but Zener believes they will recover first based on a historical review of their performance going back to the 1960s. The analyst has been positive on homebuilders since September, after warning in January that the stocks faced a “wall of worry.”

In an interview, Zener said that he is more optimistic than ever that homebuilders will outperform the market on a relative basis. Zener is the top-ranked analyst on Wall Street based on absolute returns for at least four of the builders he covers over the past year, including industry giants D.R. Horton Inc. and Lennar Corp., according to data compiled by Bloomberg.

Zener compared homebuilders to the broader market in recent decades. His grim outlook in January reflected how the stocks performed in Federal Reserve tightening periods. However, his bullish pivot in September was due to the timing of the group’s stock performance relative to the S&P 500.

In his September note, he wrote that "early pain" equals "early gain," highlighting that builders typically rebound ahead of the rest of the market.

The S&P Supercomposite Homebuilding Index fell 27% from January through September, while the S&P 500 dropped about 15%. Since then, builders have risen about 17% while the broader market is lower by about 1%.Zener said that their positive sector call is not necessarily an absolute call on the stocks, but their relative performance to the S&P.

Interest-rate hikes this year have had a negative impact on homebuilder stocks, as they have emerged from the supply-constrained pandemic era. This has eroded demand for homes and pressured orders and builders’ margins, sending shares plunging to the lowest level since 2020 in June. How much falling home prices and rising rates have been priced into stocks is a key question for industry watchers.

Zener is not the only analyst seeing strength. Earlier this month, Matthew Bouley at Barclays turned positive on the group, writing in a note that the “time is now for builders.” Barclays is not the only bank bullish on the builders.

Looking ahead to 2023, Zener's top picks in the group are builders with higher returns on their inventory, such as Lennar, NVR Inc., D.R. Horton and Meritage Homes Corp.

Zener wrote in his September note that he believes investing in high return on inventory builders will generate better risk-adjusted stock returns.

Lennar's comments on cancellations and gross margins sparked a rally in the homebuilding sector earlier this month. Investors will be closely watching earnings results and commentary from D.R. Horton come late January for further clues on the health of the housing market.