Buyers looking for a new house may need to throw their name in a hat and hope to win the lottery.
Taylor Morrison Home,
a builder based in Arizona, is holding drawings for purchases in hot markets like Austin, Texas, and Phoenix. Prime home lots are selling for $50,000 premiums in auctions. “We’re in a very strong market,” says Taylor CEO Sheryl Palmer.
Home-builder stocks are up 37% this year, reflecting dizzying demand, ultralow mortgage rates, and maddening construction delays. Just 34,000 completed new homes were on the market in July, well below the 87,300 average for the month since 1973. Bidding wars have broken out, including camp-outs where buyers set up umbrellas and barbecues on the sidewalk, waiting to be first in line for a new house, says BTIG analyst Carl Reichardt.
If there’s still a value play, it may be Taylor Morrison’s own stock (ticker: TMHC). It’s up just 10% this year and has gained less than half the 97% industry average over the past three years. Taylor trades around book value, compared with 1.8 times book for the industry. At a recent price of $28, it goes for 4.3 times estimated 2022 earnings, a 30% discount to peers.
The discount looks excessive. While Taylor isn’t the most profitable builder, it’s taking measures to lift returns. The company has pledged to boost gross margins on home-sale closings, from 20% in 2021 to 22% next year, and it’s aiming for a 20% return on equity, up from the high teens now. Taylor is streamlining floor plans to cut construction costs. And the company controls 76,000 lots, including raw land and plots under development. It plans for nearly 400 communities with houses for sale by year-end 2022, up from 330 in 2021.
“The stock is inexpensive,” says Reichardt, who sees it hitting $38 over the next year. “It’s a call option on the company improving efficiencies and margins. The market doesn’t believe Taylor will do that, but there’s a large margin of safety in the stock.”
The country’s No. 5 builder, Taylor focuses on West Coast and Sunbelt markets, many with healthy population growth. Under Palmer, CEO since 2007, Taylor has bought five builders over the past seven years, including AV Homes in 2018 and William Lyon Homes in 2020. The acquisitions have expanded Taylor’s geographic reach and product line to include entry-level, move-up, and “active adult” homes—typically in age-restricted developments for people over 55.
Taylor’s average closing price hit $503,000 in the June quarter, up from $458,000 last year. Houses that sold in the quarter for future delivery are averaging $597,000. Its order backlog has been growing, reaching 10,228 in June.
Palmer says demand has cooled from a “frenzied” spring, but she’s still expecting healthy sales throughout the year. The biggest obstacle now: finding labor and materials. Lumber prices remain elevated, despite…
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