The Ratings Game: It’s time buy these home builder stocks as part of the millennial-driven housing boom, analyst says

Seth also boosted his stock price targets for those home builders, to $100 from $58 for D.R. Horton, to $60 from $32 for Pulte and to $60 from $45 for Toll.

He also reiterated his buy rating on Skyline Champion Corp.
SKY,
+1.00%
while lifting his price target to $36 from $32, and kept his hold rating on Lennar Corp.
LEN,
-0.49%
but raised his price target to $93 from $62.

“We believe the millennial-driven housing boom has significant runway, as the largest cohort of the largest generation heads into their prime home-buying years (2020-2025),” Seth wrote in a note to clients.

See related: New-home construction surges to post-Great Recession high in October, driven by rise in single-family starts.

He listed four reasons why, after a strong 2020, the housing market will be even stronger in 2021:

1)The millennial tailwind should pick up speed in 2021

“The largest wave of millennials is still on the horizon, and now has pent up cash to burn, more urgency to buy homes in the ‘burbs on WFH, and potentially higher FHFA loan limits looming early next year,” Seth wrote.

He said he believes the home builders that are in best position to take advantage of this set up are those well positioned in the entry-level market segment that can continue to supply homes at affordable price points. He believes D.R. Horton is the “benchmark play” on the millennial wave next year.

2) Real-estate savvy baby boomers should bounce back from a COVID-19-driven pause

Seth believes older baby boomers will drive demand toward the lagging active adult, move-up and luxury market segments. He said PulteGroup is well positioned to take advantage of this demand, as its made-to-order business model and current pricing power should support margin expansion and higher returns on capital. He believes Toll Brothers will also benefit given its exposure to the luxury market.

3) Home prices should rise even faster

“House prices are likely to accelerate as production has just started to ramp up to fulfill backlogs, replenish tight home inventory and shore up the finished-lot supply following a stronger-than-expected year,” Seth wrote.

Also read: Existing-home sales soar despite record-low inventory.

While higher home prices should benefit investors in “stick builders,” he believes it’s just a matter of time until higher home prices crush affordability, which should shift demand for affordable homes to the manufactured home market. He said Skyline is the leader in that market.

A stick built home refers to traditional wood-framed homes built to order.

4) Borrowing rates should remain very low

“We believe mortgage rates should remain near rock-bottom levels, in the short-term, given prevailing monetary policy, which clears the way for the millennial theme to play out as hoped,” Seth wrote. Read more about Federal Reserve policy.

The SPDR S&P Homebuilders exchange-traded fund
XHB,
-0.18%
has rallied 25.5% year to date through Friday afternoon, while the S&P 500 index
SPX,
-0.24%
has advanced 10.7%.