We recently published a list of the 10 best residential real estate stocks to buy, and in this article we’ll take a look at how Toll Brothers, Inc. (NYSE:TOL) stands up against other residential real estate stocks to buy.
Home buyers have more negotiating power than sellers, economists say
The interest rate hikes that began in March 2022 as a fight against inflation are coming to an end as the Federal Reserve Board decided to cut interest rates for the first time since 2020. The cuts began with a half-percentage point cut on September 18. This long-awaited move lowered interest rates to around 4.875% at the midpoint. Keeping in mind the optimism that inflation will subside, the massive cut would be in response to the slowdown in employment. The news does not end here as officials have hinted at another half-point cut by the end of the year.
For the housing market, this significant rate cut may be seen as a signal from the Fed to reverse the mortgage lock-in effect, but the degree of easing matters. Aggressive rate cuts will reduce lending costs, build inventory of existing homes, and ease pressure on home prices, but gradual rate cuts mean less for homeowners stuck with low-interest mortgages from the early pandemic. Expectations of a rate cut at the September Fed meeting have pushed mortgage rates down to their lowest levels since February 2023. But lower mortgage rates are a double-edged sword, potentially boosting demand substantially and making homebuying even more difficult.
In an interview with CNBC, Zillow senior economist Orphe Divounguy highlighted the impact of interest rate cuts on home affordability. While home affordability remains a challenge, the market is improving. In his opinion, the best time for home buyers to act is right now, and the current situation has shifted more options and negotiating power somewhat from sellers to buyers, providing a perfect entry point for them. The number of active listings on the real estate platform has increased 22% since last year. While short-term interest rates are expected to fall, long-term rates such as mortgage rates may remain at current levels. He expects there to be more buyers than sellers in the market as affordability improves. Sellers are also doing well, as the company’s data shows that well-priced and well-marketed homes sell in just 20 days.
Now, let’s move on to the top 10 residential real estate stocks to buy.
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A team of architects gather around a blueprint to discuss the design of a luxury rental apartment.
Toll Brothers (NYSE:TOL)
Number of hedge fund holders: 46
Toll Brothers (NYSE:TOL) was founded in southeastern Pennsylvania in 1967 by brothers Bob and Bruce, who wanted to create a homebuilding company that would always set high standards. Over the years, the company has expanded across the United States and emerged as the nation’s premier homebuilder. Today, the company operates in 24 states and more than 60 markets nationwide.
With a national footprint, this homebuilding company is well positioned for growth, and with the broadest product range and price point of any construction company, the outlook for growth is even brighter. Prestigious and desirable locations for building, distinctive architecture, unmatched selection and exceptional customer service are some of the strengths that set Toll Brothers apart from its competitors.
Toll Brothers recently recorded record third quarter home sales revenue of $2.72 billion. With the current market experiencing a general shortage of housing inventory and declining mortgage rates, the outlook for the homebuilder remains bright. Notable demographic trends that will benefit the company’s business going forward include Baby Boomers looking for new homes after retirement, and the upper echelon of Millennials who will be in their 40s over the next decade.
The homebuilder has ample land under management as it plans to increase the number of communities next year. As of the end of the quarter, the company owned or managed 72,700 parcels. This strong land position provides it with ample parcels for growth in fiscal 2025 and beyond. Leveraging this position, Toll Brothers is on track to have a goal of operating in 410 communities by the end of the fiscal year, which is expected to represent 11% growth compared to the beginning of the year.
Toll Brothers has grown its sales by 25% so far this year, despite rising mortgage rates. Its unique strengths in a competitive industry like housing, favorable trends, a healthy balance sheet with low net debt, and planned growth opportunities make Toll Brothers Inc. (NYSE:TOL) one of the best residential real estate stocks to buy.
Overall, TOL ranks #4 on our list of the 10 best residential real estate stocks to buy. While we acknowledge the potential of TOL as an investment, we believe that some severely undervalued AI stocks have a better chance of delivering higher returns in a shorter time frame. If you’re looking for severely undervalued AI stocks that are more promising than TOL but still trade at less than 5x their earnings, check out our report on the cheapest AI stocks.
Read next: The $30 Trillion Opportunity: The 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and NVIDIA Has “Become a Wasteland” According to Jim Cramer.
Disclosures: None. This article was originally published on Insider Monkey.
