America's housing market has a problem that lower home prices alone can't solve. Mortgage rates above 7% have pushed monthly payments beyond the reach of many buyers, forcing homebuilders to offer increasingly expensive incentives to keep sales moving.
But this affordability crisis is also creating opportunities for companies with the financial strength to adapt.
Top Picks (Sponsored)
Only a tiny percentage of stocks meet the criteria for this report.
Analysts have released a new edition highlighting seven names selected using multiple indicators.
Recent picks have delivered notable short-term gains, though results can vary.
The latest report is now available for a limited time.
Download the free report today.
*This free resource is being sent by Zacks. We identify investment resources you may choose to use in making your own decisions. Use of this resource is subject to the Zacks Terms of Service.
*Past performance is no guarantee of future results. Investing involves risk. This material does not constitute investment, legal, accounting, or tax advice. Zacks Investment Research is not a licensed dealer, broker, or investment adviser.
Theme: Housing Affordability, Homebuilders, Mortgage Rates, Construction Incentives, and Residential Real Estate
The Monthly Payment Is Everything
For years, homebuyers focused primarily on purchase prices. Today, financing costs can determine whether a home is affordable at all. Freddie Mac's latest survey shows the average 30-year mortgage rate at 7.18%, compared with 6.22% a year earlier. Although rates have declined for three consecutive weeks, borrowing remains expensive.
Tuesday's inflation report delivered another setback, with consumer prices increasing 0.4% in October, exceeding expectations of 0.3%. Persistent inflation complicates the outlook for lower borrowing costs, keeping pressure on buyers already struggling with elevated home prices. Existing-home sales reached an annualized pace of just 3.99 million in September, while available inventory increased to 1.6 million properties.
But the more interesting development is how homebuilders are responding. Large developers are increasingly using mortgage-rate buydowns, closing-cost assistance, and price incentives to attract buyers. That strategy could give established builders an advantage over smaller competitors and individual homeowners who cannot offer similar financial support.
What's Driving It
Builders Are Sacrificing Margins for Sales
Lennar provides one of the clearest examples. During its fiscal third quarter, the company reported average home prices of $372,000, reflecting approximately 12% in incentives and additional pricing adjustments. Those discounts helped sustain demand but came at a cost, with gross margins declining to 15.8% from 17.5% a year earlier and net earnings falling 52%. Management expects fourth-quarter gross margins between 15.5% and 16%, suggesting affordability pressures aren't disappearing.
D.R. Horton faces similar challenges. Its fiscal fourth-quarter net sales orders declined 7%, while cancellations increased to 23% from 20% a year earlier. Management expects incentives to remain elevated throughout fiscal 2027, but larger builders have an important advantage: established financing operations, extensive land inventories, and balance sheets capable of supporting aggressive discounts. The investment opportunity is less about rising home prices and more about financially stronger builders gaining market share.
Inflation Could Keep Buyers Waiting
Higher borrowing costs also discourage existing homeowners from selling, particularly those who secured mortgages at considerably lower rates. Moving into another property could mean replacing an affordable mortgage with a much more expensive one, creating a market where both buyers and sellers have reasons to remain on the sidelines. Thursday's existing-home sales report will provide another indication of whether these pressures are easing.
The Chain Reaction
Mortgage rates remain elevated → monthly payments become less affordable → buyers delay purchases → builders increase incentives → profit margins narrow → financially stronger companies potentially gain market share → weaker transaction activity pressures real estate services.
The risk is that prolonged housing weakness eventually overwhelms even the largest builders' financial advantages.
What's Working
Some Builders Are Protecting Margins
PulteGroup demonstrates that not every homebuilder faces the same financial pressures. Its third-quarter home sale gross margin reached 24.8%, considerably higher than Lennar's 15.8%, although product mix and geographic exposure affect the comparison.
Pulte also reported a 4% increase in its unit backlog to 10,298 homes, demonstrating continued demand across its diversified customer base.
Housing Services Are Finding Other Growth Engines
Zillow's latest results reveal another interesting development. Third-quarter residential revenue declined 4%, reflecting weaker home transactions, but mortgage revenue increased 32% while rentals revenue grew 26%.
That diversification helped total revenue increase 7% to $724 million despite challenging conditions. Home Depot is also benefiting from homeowners maintaining existing properties, with second-quarter comparable sales increasing 1.7% as consumers continued spending on smaller improvement projects.
What to Watch
Thursday's existing-home sales report should provide fresh insight into transaction volumes, available inventory, and housing affordability. Watch whether rising inventories create meaningful relief for buyers or simply reflect weaker demand.
Homebuilders' next earnings releases should also reveal whether incentives are stabilizing and margins can recover. The strongest signal would be improving orders without increasingly aggressive discounts.
D.R. Horton (DHI)
What it does: Builds and sells residential homes across the United States, primarily serving entry-level and move-up buyers.
Why it fits: Its scale and financing capabilities provide flexibility to compete on affordability.
What stands out: Fiscal 2026 operating cash flow reached $3.5 billion, although Q4 net sales orders declined 7%.
The Takeaway: Buy this if you want a financially established homebuilder positioned to gain market share during difficult conditions. The risk is prolonged margin pressure.
Lennar (LEN)
What it does: Develops residential communities and provides mortgage financing and related homebuying services.
Why it fits: Its strategy emphasizes maintaining production and sales volumes through competitive pricing and incentives.
What stands out: Q3 incentives reached approximately 12%, while gross margins declined to 15.8%.
The Takeaway: Buy this if you want a major homebuilder positioned for an eventual affordability recovery. The risk is continued earnings deterioration.
Power Demand Surges (Sponsored)
Something new is plugging into the power grid and draining it — something that can devour the electricity of 100,000 homes at once, likely being built in your state right now.
See what it is
In some states, bills are already up 20% in a year, and James Altucher believes that's just the start.
Why he thinks bills keep climbing
So he's identified the one company he believes is positioned to benefit from that plan. Any single position can lose money.
Get the details in James' FREE briefing now.
PulteGroup (PHM)
What it does: Builds homes across entry-level, move-up, and active-adult housing markets.
Why it fits: Its diversified customer base provides flexibility across different housing segments.
What stands out: Q3 gross margins reached 24.8%, while unit backlog increased 4% to 10,298 homes.
The Takeaway: Buy this if you want a homebuilder demonstrating stronger margin resilience. The risk is weaker demand and higher incentives.
Zillow Group (Z)
What it does: Operates digital real estate marketplaces, mortgage services, and rental platforms.
Why it fits: Benefits from housing transactions while developing revenue streams less dependent on completed home sales.
What stands out: Q3 mortgage revenue increased 32%, and rentals revenue grew 26%, despite weaker residential activity.
The Takeaway: Buy this if you want a housing technology company expanding beyond traditional property listings. The risk is persistent transaction weakness.
Power Grid Bottleneck (Sponsored)
Not long ago chipmakers had the upper hand.
Electricity suppliers have it now, because power has quietly become the AI boom's bottleneck.
Who supplies the power?
Data centers took 4.4% of U.S. electricity in 2023.
Lawrence Berkeley National Laboratory projects up to 12% by 2028.
Text me the ticker and story
The grid was not built to carry that, and one American energy company is already feeding the demand.
I'd like the stock's name
*This ad is sent on behalf of Guardian Financial Publishing LLC, doing business as Stable Financial Publishing, 1013 Centre Road Suite 403-D, Wilmington, DE 19805. Nothing here is investment, financial, legal, or tax advice, and it is not a recommendation or solicitation to buy or sell any security. Investing involves substantial risk, including loss of principal; past performance does not guarantee future results. Data-center electricity figures are third-party estimates and projections, and AI IPO timing reflects investor expectations, not company guidance. References to OpenAI, Anthropic and Lawrence Berkeley National Laboratory are for informational purposes only; Stable Financial Publishing is not affiliated with, endorsed by, or sponsored by OpenAI, Anthropic or Lawrence Berkeley National Laboratory. Stable Financial Publishing, its owners, employees and contributors may hold positions in securities mentioned and may trade them at any time. Privacy: https://guardian.pub/privacy-policy/ · Terms: https://guardian.pub/terms-of-service/
Fusion powers your city in your lifetime, or never happens at all?
Home Depot (HD)
What it does: Supplies home improvement products, building materials, and professional contractor services.
Why it fits: Homeowners delaying purchases may continue investing in repairs and improvements to existing properties.
What stands out: Q2 sales increased 5.7% to $47.9 billion, while comparable sales grew 1.7%.
The Takeaway: Buy this if you want diversified housing exposure without relying entirely on new construction. The risk is weaker renovation spending.
That’s all for today. Thank you for reading. If you have any feedback, please reply to this email.
Best Regards,
— Adam Garcia
Elite Trade Club
Click here to get our daily newsletter straight to your cell for free.
P.S. Just like this newsletter, it's 100% free*, and you can stop at any time by replying STOP.
