Setup feels good for homebuilder stocks into 2026, says UBS' John Lovallo

Core Viewpoint - The housing market is expected to improve in 2026, with strong underlying factors in place despite current challenges [2][8]. Market Dynamics - Inventory levels have been adjusted across most markets, and consumer intent to buy remains strong, with mortgage rates down approximately 100 basis points since January [3][5]. - Builder inflation on input costs is moderating, and current trading is at about nine times forward earnings, indicating a favorable setup for builders [4]. Home Price Trends - Home prices have appreciated by 56% since 2019, contributing to a significant amount of home equity, estimated at $35 trillion [4][5]. - Despite recent pullbacks, there is no expectation for prices to continue falling due to tight inventory and strong underlying demand [5]. Consumer Confidence - Consumer confidence is currently low, described as being at a global financial trough, which is impacting the market [7]. - Improvement in consumer confidence is necessary for the housing market to stabilize and grow, with signs of stabilization beginning to emerge [8]. Builder Strategies - Builders are adapting by buying down mortgage rates, constructing smaller homes, and optimizing build processes, which gives them an advantage over the existing home market [10][11]. - The ability to efficiently manage costs and build processes will support builders' performance in the upcoming year [11]. Investment Outlook - The current stock valuations reflect significant pessimism, suggesting that there may be an opportunity for growth when consumer confidence begins to recover [12][13]. - A bottoming out of consumer confidence is anticipated to trigger a rally in builder stocks, indicating a potential investment opportunity [11][13].