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4 Housing Stocks Still Standing Despite Supply Chain Issues

A building-materials shortage hasn’t helped the short supply of homes.

U.S. housing demand remains strong, but supply chain woes have created a shortage of building materials and have delayed new home construction.

In a recent report, equity analysts Brian Bernard, Jaime Katz, and Kevin Brown looked at how supply chain disruptions have affected different parts of the housing industry. Morningstar Direct clients can read the full version here.

In this article, we’ll examine why supply chain disruptions aren’t helping the housing shortage and what stocks our analysts think are still standing despite these issues.

Building-Materials Shortage Ramped-up new home production has put supply pressures on a variety of materials required to build homes. According to a National Association of Home Builders survey, many homebuilders lack home appliances like refrigerators, materials like lumber, and other crucial pieces like windows and doors.

Supply chain issues are also complicating the construction of new neighborhoods, which are being sold faster than they can be replaced, and increased construction times from the lack of building materials is one of the causes.

Bernard, Katz, and Brown expect supply chain issues to continue for the rest of 2021 but start to ease in 2022. In fact, they believe supply chain disruptions aren’t a long-term issue.

Housing Shortage to Remain The authors point to a shortage of available homes since late 2019. The National Association of Realtors and Rosen Consulting Group estimate this shortage is at least 5.5 million homes.

But NAR’s estimate doesn’t account for changes in population growth and demographics, according to Bernard, Katz, and Brown. After including these factors, the analysts believe the shortage is closer to 3.8 million homes--a supply gap that would still be challenging to close by 2030.

Housing-Related Companies Feeling the Burn Supply chain disruptions and soaring inflation have constrained revenue growth and profit margins for many building-products manufacturers. Some companies, such as PPG PPG and Sherwin-Williams SHW, cut financial guidance ahead of earnings.

Even home improvement companies like Home Depot HD and Lowe’s LOW, which benefited from do-it-yourself spending, will find it difficult to maintain sales growth. The authors believe both companies will report modest sales declines and moderating earnings growth in the second half of their fiscal years.

E-commerce leaders AMZN and Wayfair W have put pressure on predominantly brick-and-mortar retailer Bed Bath & Beyond BBBY. The authors expect sales to fall by 1% over the next five years as its stores close and experience less foot traffic.

Top Housing Picks Homebuilder Lennar LEN and building-products manufacturer Masco MAS are the most attractively valued stocks in their respective industries, but they should be on investors' watchlists if they become undervalued (both receive Morningstar Ratings of 3 stars, meaning they are fairly valued).

Williams-Sonoma WSM is an attractively valued stock in its industry, but it also receives a Morningstar Rating of 3 stars. The authors believe this company is better positioned to weather supply chain disruptions--as many of its products are made in United States. This makes Williams-Sonoma less reliant on ocean and air freight, supporting relatively smoother sales.

Apartment REIT valuations are rich, but it’s worth keeping an eye on AvalonBay Communities AVB. The authors consider it overvalued with a Morningstar Rating of 2 stars.

Morningstar Ratings for stocks are as of Nov. 5, 2021.

Lennar LEN Subindustry: Homebuilding Morningstar Rating for Stocks: 3 Stars Economic Moat: None Lennar is well-positioned to benefit from increased demand from first-time buyers, and its returns on invested capital should improve as the firm continues to shift toward a lighter land strategy. We also think the spin-off of ancillary businesses will damp Lennar's earnings volatility. Improved financial disclosure for the spun-off company could help the market better understand this once opaque--yet, in our view, valuable--portfolio of businesses.

Masco MAS Subindustry: Building Materials and Products Morningstar Rating for Stocks: 3 Stars Economic Moat: Wide Masco's 2021 revenue growth may be more subdued than that of some other building-product firms as DIY spending normalizes. However, we still see solid growth and profitability for Masco over our 10-year forecast. Masco's key organic growth initiatives include increasing Behr's professional painter market share and extending the plumbing segment's product portfolio.

Williams-Sonoma WSM Subindustry: Home Improvement and Home Goods Retail Morningstar Rating for Stocks: 3 Stars Economic Moat: Narrow Williams-Sonoma is pivoting to capitalize on higher-margin white-space opportunities, supporting both top- and bottom-line growth ahead. We expect stronger sales growth driven by faster adoption of offerings across business to business, marketplace, franchise, and direct to consumer. More important, our 2030 operating margin outlook is now above 15%, as we expect sales subject to higher profitability will account for a larger proportion of total sales over time.

AvalonBay Communities AVB Subindustry: Apartment REITs Morningstar Rating for Stocks: 2 Stars Economic Moat: None AvalonBay Communities owns and operates high-quality multifamily buildings in urban and suburban coastal markets with demographics that allow it to maintain high occupancies and drive strong rent growth. The company regularly recycles capital by selling noncore assets or exiting markets and using the proceeds to develop its pipeline or for acquisitions with promising growth prospects, a sound strategy that continues to produce strong returns.

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