Opportunities in Housing and a Solar Scare
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Which home builder would you buy? Motley Fool Money starts now.

I'm Anand Chakravallu and I'm joined by two of my favorite Fools, Matt Frankel and Jason Hall. Today, we're talking all about housing, including earnings from Lennar, the largest homebuilder in America. We'll pick our favorite three homebuilders, maybe Lennar is there, maybe it isn't, and we three homeowners will debate how we think of our houses as investments. But first, here are a few headlines on our radar.

President Trump left the G7 summit early. Referencing the Israel-Iran fighting, he said his leaving certainly has nothing to do with a ceasefire, much bigger than that, and urged Iranian civilians to immediately evacuate Tehran.

As we're recording this morning, solar stocks are getting hammered. Think down around 20% for first solar and end phase to 40% for sunrun. This is because the Senate version of Trump's spending bill would phase out both solar and wind incentives by 2028, while incentives for nuclear, hydropower, and geothermal energy would last longer.

Retail sales fell 0.9% month-over-month in May. That's worse than the 0.6% drop expected by economists. That's another data point ahead of the Fed interest rate announcement on Wednesday. And finally, OpenAI and Microsoft tensions are rising within their six-year-long relationship. As a major shareholder, Microsoft will have to be on board if OpenAI can ever convert to a for-profit company.

Meanwhile, they're frenemies who also compete with each other, so OpenAI wants to keep some things for itself, like access to the intellectual property of its recent acquisition, Windsurf. The WSJ is reporting that OpenAI executives have at least talked about the nuclear option of accusing Microsoft of anti-competitive behavior. Seasoned fools will remember that Microsoft settled an antitrust case with the government almost 25 years ago now.

Any of these stories jump out to you, Jason? I'm guessing I know which one you'll pick based on what you cover. Yeah, Anand, it's getting really cloudy in the world of solar. I think directionally, maybe the markets have it right in terms of thinking about what's going on there, the removal of those federal incentives for solar. It's a phasing out, it's not happening all at once.

But it could be hard on the companies that make the solar panels. A couple of examples, Canadian Solar, First Solar, both of which rely on the U.S.,

utility-scale market is a big part of their business. Of those two, especially First Solar, the stock's down, call it 18% as we're recording this, mid-morning. Now, Canadian Solar's stock's down about 6%. Now, Canadian Solar is a misnomer. It's really a Chinese manufacturer of solar panels, batteries, and big utility projects. It has a lot more exposure to non-U.S. markets than First Solar, and that's why its stock is not down as much.

Now, you move on to Enphase, down, call it 24%. Then, SolarEdge is down 36%. What you're starting to see is the concentration of where those businesses operate. SolarEdge and Enphase, they're very much tied to residential solar. SolarEdge has a little bit of commercial, but it's still the distributed solar. The point is that investors see this

This is a major disruption to distributed solar, probably more than utility scale, but certainly for companies that derive the bulk of their sales in the U.S.

But Sunrun might have been the hardest hit, right, Jason? Why was that? Oh, no doubt about it. It's down more than 40%. Now, Sunrun is the largest standalone solar installer. Residential solar is by far the biggest part of their business. They market their business as "the nation's leading provider of clean energy as a subscription service offering residential solar and energy storage with no upfront costs."

On and with things that have no upfront costs, there has to be somebody that pays those upfront costs. The equipment, the installation, the permitting, all that kind of stuff.

Sunrun doesn't exactly have a bunch of money just laying around to do this. It counts on financial partners to do it. Those federal tax incentives underpin the entire current financial structure of the installer business. In other words, its business model is directly at risk here. Indirectly, that puts pressure on Enphase and SolarEdge.

It's rare to see an entire industry fall as much as they are right now, those solar companies. So, is this an opportunity to buy, or is it a signal to run for the hills?

I'm tempted to call a bottom here because, while if this bill gets turned into law, it wouldn't be ideal for the residential market because the liquidity would dry up. And then you have high interest rates that are still putting pressure and holding homeowners back. This may not be an absolute bottom, but I do think this could prove maybe a temporary catalyst in some ways. They're talking about phasing these things out by 2028. So, you're going to see a lot more homeowners maybe move forward sooner rather than later.

The other thing that's not getting enough attention is how much electricity costs have increased, especially over the past five or six years.

when these incentives have been around for a long time, and those increased utility costs are making residential solar and even utility scale cost-effective in a lot of markets, even with the potential risk of those incentives. Then, looking at Enphase and SolarEdge to some degree, I think they're going to be fine. Enphase is super lean. Its manufacturing model and growing European business has allowed it -- it's actually generated free cash flow

Every quarter through this whole downturn, and SolarEdge has made some major changes and finally gotten its business more right-sized for the cycle. We also saw residential solar installations actually bottomed a couple of quarters ago, and they're starting to grow again. I think we may have already hit bottom for installations. I'm also comfortable saying that Enphase in particular is likely a profitable stock from here if you're thinking multiple years and longer.

I like the odds that it beats the market, but let's be honest, it's going to be super volatile. On the utility scale side, First Solar is a rarity. This has been a long-term moneymaker for investors. Hardly any other solar panel maker has made money for anybody. The reason they've done that is because management's been smart about monetizing their technology, but also prioritizing a strong balance sheet for these downturn periods to be able to continue to invest

and position the business to be successful while everybody else is just fighting to keep the lights on. Here's another little, I don't want to say a magic bullet on it, but I think for the case of Enphase and First Solar, we don't want to discount. They both do a ton of their manufacturing in the U.S. That's really important to this administration. So I'm not completely convinced that what's in the bill today, and that's changed multiple times, is what's going to be in the law potentially by the time it's signed in the next few weeks.

I don't have too much to add. He's definitely the solar expert out of the two of us. I would caution investors to keep in mind why we have these tax incentives in the first place. It's because the cost of solar technology hasn't evolved to the point where it is competitive with traditional energy technologies. But it will eventually get there. The whole idea is, eventually, they won't need these tax subsidies. Out of the stocks Jason talked about, I would say that Sunrun is the one I'm most inclined to stay on the sidelines.

When Jason tells me something, he's calling a bottom. I tend to listen. Some of the companies he talked about, particularly SolarEdge, is on my radar right now. Sunrun uses a solar leasing model, meaning that the company gets the tax credit, not the end consumer. Whereas, if I buy solar panels for my roof, I get the tax credit.

So, that business model is very dependent on the company getting a steady stream of government revenue. That scares me, given what's going on right now. More than the other companies, more indirect impacts, their sales will go down, things like that. Would that be fair to say, Jason? Yeah, I think it's exactly right. The reality is that when you think about highly cyclical industries, and that's certainly the case here, you want to own companies

that have some ability to control their future and aren't relying on other people's generosity with financing and that sort of thing. And Sunrun's entire business model in any of these large installers, their business model is based on having financial partners. And that entire structure could get upended. You look at the end phases in the first solars of the world, and one of the things that stands out is the strength of their balance sheet.

They're not having to put out their hat in hand to the markets to raise capital in these environments. Sunrun's business model is constantly built on having capital coming in from third parties.

When we come back, we get more clues about the economy from the housing market.

Binkerswim is available on desktop, web, and mobile to meet you where you are. It's built by the trading obsessed to help you trade brilliantly. Learn more at schwab.com/trading. Let's talk Lennar. We don't need a whole litany of numbers, guys, but was it a good quarter or a bad quarter for Lennar, Matt? Lennar's quarter was okay, is the short version. Expectations were somewhat low, as they are for pretty much all homebuilders right now, given the real estate market. The company did beat expectations on both the top and bottom lines, but

New orders, which are really indicative of future revenue, fell way short of expectations. They were on the lower end of the company's own guidance range. The average sales price per home is the real telling factor. It came in even below the low end of the company's guidance range at $389,000. That's 9% lower than it was a year ago. The short explanation is that homebuyers are staying on the sidelines. It's taking more incentives from these companies

to sell homes. They're still selling homes, but at what cost? The stock is in the green. The numbers aren't quite as bad as anyone feared, but it was an OK quarter. Yeah, I think this is a case of coming in along the lines of what were pretty low expectations. Anybody that's followed housing knows this is a weird, tough period. There's a lot of demand that's pent up.

But there's really limited supply in the high-demand markets. Lennar, they build a little bit of everywhere. They're one of the largest builders. They're seeing some of the impact of some of the less great markets that they work in that's really affecting it a lot. But these things are playing out across the homebuilder market writ large. Folks on our Friday show talked about the housing market is sending lots of mixed signals these days.

It's a bit of a housing bellwether given its size. Did Lenore tell us anything about the housing or the economy?

Yeah, it told us that housing is still slow, period. I don't think anybody, including the homebuilders themselves, expected interest rates to stay elevated for so long. At the beginning of 2024, the median expectation -- this is according to things like the Freddie Mac survey and things like that, where the rates were going to dip into the 5% range by the end of 2024. Clearly, that didn't happen. Right now, they're around 7%. I don't want to go into the mathematics of home affordability.

But mortgage rates play more of a factor in most cases than even home price changes. In addition to Lennar earnings, we just saw today that the homebuilder sentiment is near its pandemic era low, when homebuilders literally couldn't function. Sentiment fell on all three parts of the survey -- sales conditions, sales expectations, and buyer traffic.

It suggests that people who would love to buy a home are largely moving to the sidelines. 37% of homebuilders, including Lennar, have cut prices this year. That really tells you all you need to know about the state of the market.

It's not just price cutting. There are other incentives like buying down mortgage rates and throwing in free appliance upgrades and that kind of thing. There's other things, too, that aren't just lowering prices that are affecting homebuilders. They're getting squeezed on both ends, not just their selling price and promotions, but

but costs as well. Land, labor, and lumber costs are up. We could see more pressure there, too, depending on the Trump administration's actions on tariffs. Canadian lumber is a big part of the supply. And labor supply, the realities that undocumented immigrants make up a massive percentage of homebuilder-skilled labor in the U.S. No matter where you stand on the politics, the economic impact of reduced labor supply means higher labor costs. That's more pressure on homebuilders' bottom lines

and potentially hindering their ability to build enough supply where there is demand. Let's take a quick moment. All three of us are homeowners, have been for a long time. It's interesting when you look at homebuilders versus, you already own a housing asset. In my mind, the bar is a little higher. Matt, how do you think of your own house as an investment as part of your portfolio of assets?

One thing I always say is that all investments are assets, but not all assets are investments. Your home is an asset. Break that down. I'm confused. All investments are assets. Your stocks you own are assets in your portfolio. But your home is an asset. Renting is a money drain. We can get into the homeowners vs. renters debate. Renting is money flowing out.

Owning a home is having an asset that you could borrow against, you could sell if you need to. It's not an investment in the sense that, say, a rental property is or your stock portfolio is.

There's a lot of hidden costs. You're paying for something that you need. You'd be surprised, especially at first, how much of your mortgage payment goes toward interest and not building you equity. It is an asset. I don't look at my own home as an investment, but I definitely look at it as a better financial move if you're going to stay in one place for a long time than renting.

I think anybody that's describing their home as an investment, they're playing a mental trick on themselves to convince themselves that it was the right decision to buy it. I think Peter Lynch described it best and went up on Wall Street when he said that a home is an enforced savings tool.

Right. Because as you pay down the debt and as the market value increases, you do add to your net worth. And eventually at some point you can monetize that, but it makes it, it's hard to monetize it and still live in it. So I think the other part of it too, in addition to it being an asset, it's also a liability. You have to deal with upkeep, maintenance, improvements, all of those things that come along with it. So I think, I think Matt's exactly right with the way to think about it again, with adding that idea of it being an enforced savings tool as well.

Yeah. And I think the worse you are with your money, the more a house saves you later in retirement. I think the numbers say something like, of medium net worth in the U.S.,

two-thirds is made up of housing equity. And the proof's in the pudding there. Most people are bad about saving enough, and that can save you. If you're excellent at saving money, maybe it doesn't matter so much. But I do like it as a diversifying agent, too. After the break, we'll get Jason and Matt's three best housing stocks.

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We're going to play top three. I'm going to list all the big homebuilders and a few others of interest. And you, Jason and Matt, you're going to give me your top three for investors looking to buy a homebuilder. We got Lennar, which we talked about earlier. I'm curious to see where it ranks. D.R. Horton, Pulte, NVR, Toll Brothers, Meritage, KB Home, DreamFinders Homes, and Green Brick Partners. Jason, what are your three?

I'm going to start with Greenbrick Partners, ticker GRBK. Maybe one of the best originators in the industry. They're exceptionally good at finding the right land, building well, pricing, and moving through their inventory quickly. Exceptionally good at that.

Meritage Homes, ticker MTH, this is probably the first of the larger builders to pivot to where the market demand was with entry-level and first move-up housing back in 2016-2017. They saw where the puck was going, skated to it, and they still have Steve Hilton, the founder, the executive chairman, who's helping navigate and drive the strategy for that business.

Lastly, I can't help myself. I've got to order off the secret menu here, Anand's. I'm going to go with LGI Homes, ticker LGIH. Not one of the ones you listed. It's a smaller builder, more leveraged, but it also has a lot of lower-cost, entry-level housing communities that are coming online this year in markets where there's demand. I think it's really positioned well to be where the market is with all of the pressures that are in place right now.

We have one overlap here. DreamFinders is my No. 1. Greenbrick Partners is my No. 2. NVR is No. 3. I will concede, everybody's problem with DreamFinders is that they use more leverage than everyone else. They have a higher debt load. They have the ugliest balance sheet of the nine you listed. I'll concede that. It is a higher-risk, higher-reward builder. But it has almost exclusive exposure to some of the highest growth markets in the country.

Great track record of creating value, both through acquisitions and organically. It's a highly profitable company, and it trades for eight times earnings. But on that note, pretty much all of these trade for 11 times earnings or less. There's a good valuation case to be made for all of those. NVR is essentially what DreamFinders wants to be when it grows up. Very similar business model, very land-light business model. Greenbrick is a more land-heavy model, but you really can't argue with its track record. You just can't.

So, Greenbrick definitely rounds out my top three. Greenbrick's the one that I'm most interested in, given that both of you have said it many times in the past. I need to get on it.

Here at The Motley Fool, we live on feedback and track stacking. To be part of that feedback or to ask a question, email us at [email protected]. As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear.

All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. For Jason Hall, Matt Frankel, and the entire Motley Fool Money team, I'm Anand Chakrabarty. We'll see you tomorrow.