We have a positive outlook for the homebuilding sub-industry in 2020, based on the 30-year fixed rate mortgage now at 4.0% versus 5.0% in late 2018, suggests Kenneth Leon, an analyst with CFRA Research's The Outlook.
Homebuilders have ample backlog to meet home deliveries for the next six to nine months, and the spring selling season for new homes that we expect to show positive year-over-year net order growth.
We see continued strong demand for the U.S. housing market driven by employment growth, higher household income, and high consumer confidence levels.
A secular demand story is taking hold with the aging of millennials, the largest population segment at 42%, with a median age of 36 and a median income at $87,500, according to Zillow. Millennial households with two-wage earners and a growing family need more space than what multifamily rentals offer.
We think 2020 is not the time for a bearish view on the U.S. housing market. Home prices are beginning to weigh favorably for buying versus rising average rents. We see property price appreciation decelerating, while renting is getting more expensive with 4% to 5% annual rate increases.
Meritage Homes Corp. (MTH) carries CFRA's highest investment ranking of 5-STARS, or Strong Buy. Our investment thesis on MTH is based on our view that millennial households are shifting to home ownership from rentals.
The company is ahead of most peers, with a high percentage of entry level home communities showing higher order demand than the move-up or near-luxury categories. We believe MTH is at a more advanced stage than peers in specializing with millennial households seeking their first home.
MTH intends to build entirely on a speculative basis (without a customer contract) in entry-level affordable communities, making it more efficient to build while also allowing buyers to move in quickly and choose their new homes. As a result of MTH's strategy to focus on entry-level with more specs, the company's total closings from spec homes increased to 70% in 2019.
On January 30, we kept our 2020 EPS estimate at $6.50 and introduced 2021’s at $7.15. MTH is gaining traction with strong demand for entry-level homes; we forecast stronger demand in the future. Our 12-month target is $87 using a forward P/E of 13.4x our 2020 EPS estimate, above the 11.5x peer average, with MTH showing faster growth.
