EUR 850.00 For Business Accounts Only

Morningstar | We've Tempered Our Outlook for U.S. Residential Construction; Homebuilder FVEs Modestly Lower

After taking a fresh look at the assumptions underlying our housing starts projections and considering recent trends in key housing data, we've lowered our expectations for new construction over the next decade. We now expect about 15 million cumulative housing starts between 2018 and 2027, about a 10% reduction from our previous forecast of approximately 16.8 million.

However, with some housing pundits proclaiming the housing market has peaked, we believe our revised forecast is still bullish relative to the consensus view. Indeed, we still see several more years of solid residential construction ahead, driven by the large and aging millennial population, continued job and wage growth, and an increased supply of entry-level homes. Our revised forecast calls for total starts to improve from 1.28 million in 2018 to 1.61 million in 2022 before moderating to 1.47 million by 2027. Previously, we projected total starts to grow from 1.30 million in 2018 to 1.93 million in 2021 and then moderate to 1.52 million by 2027. The main factors behind our moderated forecast are slower population growth driven by reduced immigration and a more difficult affordability environment than we had previously envisioned.

We've lowered by about 2% the fair value estimates of D.R. Horton (to $45 from $46), NVR ($2,400 from $2,450), PulteGroup ($32.50 from $33), and Toll Brothers ($48 from $49). We weren't convinced these builders were positioned to maintain market share during a rapid v-shaped recovery to over 1.9 million starts by 2021, but we believe they can maintain or grow market share in a housing market that recovers at a milder pace over the next few years. Our now upward-revised market share assumptions lessened the impact of our lower starts forecast.

We've reduced our fair value estimate for Lennar by about 8% to $69 per share, however most of this reduction was due to refined modeling of the recent CalAtlantic merger.

Specifically, we trued up our year-end fiscal 2018 capital structure and share count assumptions, which accounted for most of Lennar's fair value estimate change.

Our fourth-quarter U.S. housing outlook, which we expect to publish in October, will provide investors with a more detailed review of our housing forecast revisions as well our top picks in housing-related sectors.