Zacks Industry Outlook Toll Brothers and Dream Finders Homes

For Immediate ReleaseChicago, IL – March 25, 2025 – Today, Zacks Equity Research Equity areToll Brothers, Inc. TOL and Dream Finders Homes, Inc. DFH.Industry: HomebuildersLink: https://www.zacks.com/commentary/2434189/2-homebuilding-stocks-in-focus-defying-industry-challengesThe U.S. homebuilding industry is navigating a complex set of challenges due to elevated mortgage rates. Also, high construction costs and a persistent shortage of buildable lots are marring the prospects of the Zacks Building Products - Home Builders industry. Builders face mounting financial pressures due to rising material and labor expenses, which constrain their ability to price homes competitively. Additionally, the Federal Reserve’s cautious stance on rate cuts reflects ongoing economic uncertainty, prompting consumers to prioritize essential spending and adopt a more frugal approach to their disposable income.Despite these hurdles, the industry remains poised for growth. Factors such as the Fed's eventual rate cuts, a limited supply of homes for sale and strong demand for homeownership are expected to bolster the sector. Industry players are employing strategies like mortgage buydown programs and a mix of speculative building with build-to-order projects to cater to diverse buyer needs. Companies like Toll Brothers, Inc. and Dream Finders Homes, Inc. are also benefiting from initiatives focused on cost management, enhanced operating leverage, balanced business models, asset-light strategies and strategic acquisitions.Industry DescriptionThe Zacks Building Products - Home Builders industry comprises manufacturers of residential and commercial buildings. Some industry players are involved in providing financial services that include selling mortgages and collecting fees for title insurance agencies, as well as closing services. The industry players are involved in building single-family detached and attached home communities, townhouses, condominiums, duplexes and triplexes, master-planned luxury residential resort-style golf communities, and urban low, mid and high-rise communities. The companies are also involved in the purchase, development and sale of residential land. The companies build and own multi-family rental properties, residential real estate, and oil and gas assets.3 Trends Shaping the Homebuilding Industry's FutureEconomic Uncertainties: The U.S. homebuilding industry remains mired in challenges, with high interest rates, soaring construction costs, and a severe shortage of buildable lots stifling growth. Despite keeping rates at 4.25%-4.5%, the Federal Reserve has painted a grim picture of economic uncertainty, hinting at potential cuts later this year. Fed Chair Jerome Powell acknowledged the "remarkably high" unpredictability, while Donald Trump has aggressively pushed for deeper cuts. At the same time, economists warn that tariffs could worsen inflation, contradicting Trump’s claims that they will benefit the economy. In its March 2025 meeting, the Fed slashed its GDP growth forecast for 2024 to a dismal 1.7%, down from 2.1%, while projecting inflation to climb to 2.7%, driven in part by tariffs.Even as mortgage rates remain under 7% for nine consecutive weeks as of March 20, 2025, according to Freddie Mac, the housing market is being crushed under the weight of rising material and labor costs, a dire shortage of buildable lots, and worsening financial strain on homebuilders, forcing many to slash prices and offer desperate sales incentives. The looming threat of further tariff hikes under the new administration only adds to the uncertainty, with inflationary pressures likely to spiral out of control. To make matters worse, the industry faces a crippling shortage of skilled labor, making it even harder to meet housing demand. With economic instability on the rise, the outlook for the housing market—and the broader economy—remains bleak.Lack of Supply & Mortgage Buydown Programs: In 2024, the Federal Reserve cut the federal funds rate three times, totaling 100 bps, bringing it to 4.25%-4.50%. Anticipated rate cuts in 2025, an improving U.S. job market and growing acceptance of the new mortgage rate benchmark are expected to stabilize the housing market in the later part of 2025.There is a sizable shortage of new and existing homes after more than a decade of under-building compared with population growth. Low housing inventory, the desire to own a home and favorable demographic trends have been propelling growth in the new home market. Homebuilders anticipate this momentum to persist in the long run, buoyed by these factors.The economy's resilience, driven by steady job and income expansion, coupled with a surge in household formation surpassing pre-pandemic levels, underpins optimistic projections for the market's fundamental support in the coming months. The overall housing starts in February 2025 grew month over month, indicating an improving trend. Being the primary contributor to the overall housing start boost in February, single-family starts increased 11.4% to 1.11 million units, marking the highest pace since February 2024.Meanwhile, the increased use of mortgage rate buydowns — temporary interest rate reductions offered along with the purchase of a new home to ease borrowers into the full mortgage payment for the beginning of a loan term — has been driving demand. Buydowns appear to be more of a marketing tool to offset the salience of high mortgage rates. The companies are also effectively managing a balance between spec (speculative) and build-to-order approaches to drive growth by maintaining a strategic mix and responding to market conditions.Cost-Control Efforts, Focus on Entry-Level Buyers & Acquisitions: Given the accelerated raw material prices, companies have been relying on effective cost control and focusing on making the homebuilding platform more efficient, which is resulting in higher operating leverage. Homebuilders have been controlling construction costs by designing homes efficiently and obtaining construction materials and labor at competitive prices.Some homebuilders also follow a dynamic pricing model, which enables them to set the price according to the latest market conditions. The majority of companies are focused on the growing demand for entry-level homes and addressing the need for lower-priced homes. Meanwhile, industry players have been acquiring other homebuilding companies in desirable markets, resulting in improved volumes, market share, revenues and profitability.Zacks Industry Rank Indicates Bleak ProspectsThe Zacks Building Products - Home Builders industry is a 17-stock group within the broader Zacks Construction sector. The industry currently carries a Zacks Industry Rank #231, which places it in the bottom 6% of more than 250 Zacks industries.The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates dim near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of a lower earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since December 2024, the industry’s earnings estimates for 2025 have decreased to $11.04 per share from $12.02.Despite the industry’s blurred near-term view, we will present a few stocks that one may consider adding to their portfolio. Before that, it’s worth taking a look at the industry’s shareholder returns and current valuation.Industry Lags Sector and S&P 500The Zacks Building Products - Home Builders industry has underperformed the S&P 500 Index and the broader Zacks Construction sector in the past year.In the past year, the industry has declined 20.5% compared with the broader sector’s 8% drop. The Zacks S&P 500 Composite has risen 9% over this period.Industry's Current ValuationOn the basis of the forward 12-month price-to-earnings ratio, which is commonly used for valuing homebuilding stocks, the industry is currently trading at 8.87 compared with the S&P 500’s 22.85 and the sector’s 16.34.Over the last five years, the industry has traded as high as 11.78X and as low as 4.19X, with a median of 9.04X.2 Homebuilding Stocks in FocusWe have selected two stocks from the Zacks homebuilding space that currently carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.Dream Finders Homes: Based in Jacksonville, FL, DFH offers Dream Series (affordable homes), Designer Series (customizable move-up homes) and Platinum Series (luxury homes). It also serves 55+ active adults and luxury custom home buyers for market diversification. DFH had 242 unique active communities in 10 states and had delivered more than 38,000 homes since its inception as of Dec. 31, 2024.The company closed 8,583 homes in 2024, up from 7,314 in 2023, demonstrating consistent growth in demand. A key differentiator for DFH is its land-light approach, which minimizes direct land ownership and instead relies on strategic lot purchase contracts and land banking arrangements. This approach reduces financial risk, enhances asset turnover and improves return on equity.The company also has been gaining from both organic expansion into high-growth metropolitan areas and strategic acquisitions. Its total closings have grown at a compound annual growth rate (CAGR) of 47% since its first full year of operations. Similarly, revenues have grown at a CAGR of 46%, with 2024 revenues reaching $4.45 billion.Dream Finders Homes — a Zacks Rank #3 stock — has declined 45% in the past year. Nonetheless, DFH has seen an upward estimate revision for 2025 earnings to $3.14 from $3.11 per share over the past 30 days. The Zacks Consensus Estimate for its 2025 earnings per share (EPS) is expected to register a 6% year-year-year decline. It carries an impressive VGM Score of A. DFH has a trailing 12-month Return on Equity (ROE) of 30.5%.Toll Brothers: This Horsham, PA-based company is a premier luxury homebuilder. Despite recent challenges, Toll Brothers remains a fundamentally strong company with solid long-term prospects. Toll Brothers continues to attract high-net-worth buyers, maintain stable pricing and manage inventory strategically to navigate market fluctuations. Its disciplined financial strategy, including a $500 million stock repurchase plan, reinforces management’s confidence in the company’s future.The company signed 2,307 net contracts worth $2.3 billion, a 13% increase in units and 12% in value in the recently released first-quarter fiscal 2025 results. Contracts per community rose 2% year over year. The deposit conversion ratio reached 82%, exceeding the five-year average of 70%.Toll Brothers — a Zacks Rank #3 stock — has declined 15.6% in the past year. The Zacks Consensus Estimate for its fiscal 2025 EPS is expected to register an 8.1% year-year-year decline. It carries an impressive Value Score of B. TOL has a trailing 12-month ROE of 18.3%.Why Haven't You Looked at Zacks' Top Stocks?Since 2000, our top stock-picking strategies have blown away the S&P's +7.7% average gain per year. Amazingly, they soared with average gains of +48.4%, +50.2% and +56.7% per year.Today you can access their live picks without cost or obligation.See Stocks Free >>Media ContactZacks Investment Research800-767-3771 ext. 9339support@zacks.comhttps://www.zacks.comPast performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.5 Stocks Set to DoubleEach was handpicked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2024. While not all picks can be winners, previous recommendations have soared +143.0%, +175.9%, +498.3% and +673.0%.Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.Today, See These 5 Potential Home Runs >>Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Toll Brothers Inc. (TOL): Free Stock Analysis Report Dream Finders Homes, Inc. (DFH): Free Stock Analysis ReportThis article originally published on Zacks Investment Research (zacks.com).Zacks Investment ResearchWeiter zum vollständigen Artikel bei Zacks Weiter zum vollständigen Artikel bei Zacks