'Wednesdays With Wedbush' On PreMarket Prep Plus: What's Up With The Homebuilders?

On PreMarket Prep Plus "Wednesday's With Wedbush" Jay McCanless, equity analyst for the homebuilder sector joined the broadcast.

Overview: The housing sector has been a stellar performer over the last two years. With higher interest rates on the horizon, can the stealth move higher continue?

McCanless believes the upward momentum will continue for a few different reasons. He noted there were “robust sales” to start the year and that the homebuilders were able to clean out their inventory of “spec homes.” As a result, they're planning to replenish the former supply along with taking orders for new custom-built homes, as well and developing community housing to support the effort.

In addition, McCanless pointed out that since the spring of 2020, the number of existing homes for sale has declined, creating a need for new builds. Finally, mortgage rates have edged up since the first round of tapering, but at this point have not put a crimp in the strong demand for new homes.

These factors combined make him positive for the sector in 2022.

Impact Of COVID-19: It became apparent to McCanless by May 2020 that there was going to be a "large shift from away from the urban cores, especially of northern California and the northeast and into smaller markets."

Over the summer of 2020, when consumers began to travel more, some believed the COVID-19 migration was over. However, beginning in September his channel checks in Texas, Florida and the remainder of the Southeast indicated strong demand, with much of it coming from new buyers to the region.

Supporting his thesis of the migration out of urban areas is the newfound flexibility in the workplace and the desire for more options in terms of education for those with children.

Simple Demographics: McCanlesss discussed how the ongoing change in the make-up of the U.S. population is another positive for the housing sector. As the bulk of the population moves from the aging Baby Boomers and Gen X to Gen Y & Z, there will be a steady increase in demand for those wanting to stop paying higher and higher rents and begin to build equity in owning a new home.

Mid-Cap Pick: At the top of his list is more on the luxury side with Tri Pointe Homes Inc. TPH. The higher-end builder has benefited from the “lateral migration inside California” moving out of the congested cities to more remote areas.

Large-Cap Pick: McCanless’s large-cap pick just made a new all-time high on Monday -- D.R. Horton DHI.

“The company did a great job five years ago pivoting to the entry-level buyer," McCanless said. At the time of the move, there wasn't much expectation for that class of homes to be the most desirable.

“They were ahead of the curve on that and have benefited from," he said.

The company also has paid back much of its debt and has a more aggressive stock buyback program in place, which has pleased Wall Street.

The entire interview from Wednesday’s broadcast with Jay McCanless can be found here: