As the US stock 13F position report (i.e. the institutional investor position report) closed in the second quarter, the latest shareholding movements of investment giants was announced.

God Buffett's Berkshire Hathaway company published a 13F position report, the biggest action in the second quarter is to bet on three real estate stocks, namely Horton House (DHI), Lainer Construction (LEN) and NVR Inc (NVR).

However, in the real estate industry, there is a company whose share price rose more this year than the three selected by Buffett. It is the luxury developer Tolle Brothers.

The Thor Brothers (NYSE: TOL) is a luxury home builder.The company designs, builds and sells a range of luxurious detached homes, townhouses and golf resort-style communities. Its business segment includes two parts of traditional housing construction and urban living.

What is so special about this company? This article will take you in-depth understanding of the company from three questions.

Why did homebuilder stocks rise sharply in 2023?

To figure out what happened in the real estate market in 2023, we must start with 2020.

The COVID-19 pandemic has profoundly impacted all economic sectors, and the residential construction industry is no exception. Rising material costs due to supply chain disruptions and labor shortages continue to push prices up. In the meantime, the Fed's “big release” made many homeowners locked in low rates to buy a house.

Mortgage rates began to soar in 2022, affected by the Fed's rate hike. What happens when interest rates rise? The most immediate effect is that the cost of borrowing to buy an existing home becomes more expensive. You know, about 80% of homeowners mortgages in the US are currently below 4%. And in August 2023, mortgage rates have reached 7.23%, a 22-year high. So here's a phenomenon: owners with existing homes are not willing to sell their hands, because selling means they will buy a new home with a higher borrowing cost. This has caused a serious shortage of second-hand housing in the market.

Existing home sales in 2023 fell significantly compared to 2022. The reason, NAR chief economist Lawrence Yun (Lawrence Yun) said it was still because of the high mortgage interest rates and historical low stock of existing homes in the market.

All in all, the market is faced with “there are not enough homes for sale at all”. And this phenomenon for the Thor brothers and other homebuilders is “a great thing that can not be met.”

In the second half of 2022, homebuilders had to cut prices and offer incentives to boost sales due to fears of slowing demand from rising interest rates. Right now, after a difficult period, homebuilders are raising prices for newly built homes and increasing the volume of new properties.

In 2023, homebuilders set a record after another, releasing the best results for the first half of almost a decade. Home builder equities outperform the entire market — up more than 50% so far this year, while the S&P 500 index is only up 18%.

What's so special about the Thor Brothers compared to other homebuilders?

The answer is simple, Thor brothers' business serves more high-net-worth customer groups, with a certain degree of immunity to interest rate risk. 20% of buyers pay in cash, insensitive to interest rates. The remaining customers have an average loan value of 70% and need to use large loans. Many banks still offer large loans at interest rates below 4.50%.

In addition, the company currently has nearly 12,000 backlog orders (equivalent to a year's workload).

With regard to inflation risk, the company has some leverage available. In addition to 12,000 homes in its backlog order, it owns or controls an additional 70,000 plots that have been locked in land prices. Its main inflation risk is that new buyers will be overrun by market pricing — which is certainly a risk, but less for Toll Brothers's wealthy customer base.

Analysts at Simply Wall St argue that the Thor brothers have an impressive ROE. The company's ROE is 22%, which is above the industry average of 18%. In terms of net profit growth, the company's profit growth over the last five years was lower than the industry and market average, but last year's earnings growth was far more than the industry and market average as of August 2023.

Future prospects and risks

In the short term, Barclays analysts believe that even though it rose sharply in 2023, homebuilders are still not expensive by historical standards. Formerly 1.4x the average, the overall is in line with the historical average, with further upside. In particular, with better yield rates, inventory turnover and significant share repurchase capabilities, homebuilders expect further ROE upside upside in market valuations.

For the Thor Brothers, analysts at Zucks said there was limited competition in the market focused on luxury homes. The Thor brothers have a unique advantage in rising interest rates, and other residential construction companies enjoy greater pricing power, so the build-to-order approach will drive the company's continued growth.

In the long term, analysts at Investor's Business Daily said that the United States is facing a long-term shortage of housing, new home construction can't keep up with the pace of population growth. Rising material costs, supply chain issues and labor shortages have exacerbated since the pandemic. According to the National Association of Realtors, the current housing shortage is about 5.5 million units. NAR said that the gap is so large that even if the construction of new homes accelerates, it will take more than a decade to make up.

Opportunities are risks — analysts at Zucks say that as the housing market is a cyclical industry, influenced by consumer confidence levels, current economic conditions and interest rates. Actions of the federal government related to stimulus, tax and lending restrictions may affect consumer confidence and spending levels, adversely affecting the economy and the real estate market. Investors should therefore be cautious during periods of more frequent policy changes.