Key Points
-
High mortgage rates are straining home affordability.
-
NVR and Dream Finder’s Homes are two struggling homebuilders that would benefit from lower rates.
-
The companies are currently ceding selling prices to get volumes out the door.
- 10 stocks we like better than Dream Finders Homes ›
The 30-year mortgage rate in the United States is creeping back toward 7%. If 2026 ends the year at or around these levels, this would be over four years with loan rates above 6%, the highest level since the housing bust in 2008.
Rising interest rates are straining home affordability and destroying homebuying demand. Homebuilding stocks are getting caught in the crossfire, such as NVR (NYSE: NVR), which is down 36% from its highs. However, if mortgage rates do finally fall, NVR would be one of two homebuilding stocks I would be eager to add to my portfolio.
Here’s why homebuilding stocks should thrive with lower mortgage rates.
NVR’s capital light and buyback program
NVR is a long-standing homebuilder that pioneered the asset-light land option model, which allows it to buy contracts to build on land plots without actually forking over heaps of capital for ownership before its builds are finished. This has improved its cash conversion, resulting in free cash flow that exceeds that of its industry peers.
It has used its nice free cash flow to consistently return cash to shareholders through repurchases. Shares outstanding are down 32% over the last 10 years and 78% since around the turn of the century, which has helped make NVR stock a long-term stock market winner.
Right now, it is facing headwinds from tepid homebuying affordability, which is causing it to cede gross margins on units sold. Gross margin for homebuilding was 19.2% last quarter, down from 21.5% in the same period a year ago. This margin pressure has eroded NVR’s operating profit, which is now down to $1.2 billion from a peak of over $2 billion. A margin recovery could make NVR stock rather cheap over the next five years.
Fast growth at Dream Finders Homes
Another homebuilder that has utilized the land-option model to aggressively gain market share is Dream Finders Homes (NYSE: DFH), which has gobbled up smaller players across the Sun Belt and the Atlantic coast to rapidly expand its market share. Its revenue was $4 billion over the last 12 months, which is less than half of what NVR generates annually.
Like NVR, Dream Finders Homes has seen its margins compress due to affordability pressures, with its gross margin down to 14.2% last quarter. This lower margin indicates that Dream Finders Homes is being more aggressive in maintaining revenue levels than NVR, while also operating as a more immature business.
Its stock is in a much steeper downturn, down 72% from its highs, as investors had previously priced in massive growth expectations. However, this could give it much more upside in a turnaround, with the stock now trading at a market cap of $1.1 billion, which is barely over 2x its peak operating earnings.
Data by YCharts.
Why mortgage rates matter
Mortgage rates matter greatly for homebuilders in 2026 and beyond because it dictates how much margin they can earn on sales.
Right now, estimates state that it takes a record salary of around $110,000 to afford the median home in the United States. With many existing homeowners staying on the sidelines, high mortgage rates and high starting home prices mean homebuilders are forced to trim selling prices to move volume, which is why both NVR and Dream Finder’s Homes’ margins are down.
If this dynamic reverses, the two companies would be able to maintain higher selling prices without sacrificing unit volume, leading to much better margins and cash flow. This, in turn, would likely lead to higher share prices in the next five years.
Should you buy stock in Dream Finders Homes right now?
Before you buy stock in Dream Finders Homes, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Dream Finders Homes wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Netflix made this list on December 17, 2004… if you invested $1,000 at the time of our recommendation, you’d have $384,839!* Or when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $1,385,657!*
Now, it’s worth noting Stock Advisor’s total average return is 936% — a market-crushing outperformance compared to 213% for the S&P 500. Don’t miss the latest top 10 list, available with Stock Advisor, and join an investing community built by individual investors for individual investors.
Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Dream Finders Homes and NVR. The Motley Fool has a disclosure policy.
Source link