Key Points

High interest rates have weighed on the housing sector, but there's a significant shortage of homes in the U.S. Williams-Sonoma has performed well in a challenging environment and continues to expand its profit margins. Green Brick Partners has been a top homebuilder stock thanks to a smart land management strategy.

The housing sector has struggled in recent years as high interest rates and the lock-in effect of low mortgage rates during the pandemic have put pressure on home sales.

Existing home sales have hovered around 4 million since the start of 2023, about 30% below where they were before the pandemic, but there is a silver lining for homebuilders and others in the sector who benefit from housing activity.

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There's a significant housing shortage in the country, and while estimates vary, Realtor.com believes national supply is 3.8 million homes below demand. It would take homebuilders 7.5 years to make up for that. There's a huge backlog, in other words, for new home demand, and though it may take a change in zoning laws, interest rates, or public policy, that demand is likely to be tapped eventually.

That's good news for housing stocks, many of which are trading at a discount due to the weak housing market and fears of a recession. Let's take a look at two sector stocks that look like attractive long-term buys right now.Image source: Getty Images.

1. Williams-Sonoma

Williams-Sonoma (NYSE: WSM) might be classified as a retail stock rather than a housing stock, but there's no doubt that the company has significant exposure to the housing market. Williams-Sonoma is known for high-end home furnishings, and its empire spans three major brands, including its namesake, West Elm, and Pottery Barn.

Even as sales have been slow in a sluggish market, the company has succeeded under the guidance of CEO Laura Alber. It's maintained strong profit margins with a full-price model, controlling costs through savvy inventory management and rationalizing its store base. It's expanding the reach of the business through initiatives like B2B and new businesses like Rejuvenation, a lighting company it acquired in 2011 that it aims to grow to a $1 billion business.

Williams-Sonoma has also been a reliable company when it comes to returning to capital shareholders. The retailer just raised its dividend by 16% to $0.66 per share, a sign of confidence in the future of the business, raising its dividend yield to 1.7%. That marked its 16th consecutive year of raising its dividend.

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The company has a strong track record of repurchasing its stock as well, reducing shares outstanding by about 20% over the last five years.

Recent results have been solid as well. In its most recent quarter, Williams-Sonoma delivered record Q4 operating margin at 21.5%, and returned to comparable sales growth at 3.1%.

Overall, the company combines a set of well-regarded brands, smart management, a commitment to returning capital to shareholders, and an attractive valuation at a price-to-earnings ratio under 18. After outperforming in an ugly housing market, the stock could shine when home demand finally picks up.

2. Green Brick Partners

The current housing market has been a mixed blessing for homebuilders as low inventory of existing homes has created demand for new homes, though high mortgage rates and prices are still keeping some homebuyers on the sidelines.

One homebuilder that has a strong track record of beating the market and looks poised for further gains long term is Green Brick Partners (NYSE: GRBK), which is up 600% over the last five years.

Green Brick differentiates itself from other homebuilders by owning a significant amount of land that it has acquired through a disciplined management strategy. That has helped it achieve better margins than its competitors.

The company also focuses on markets with high population growth like Texas, Florida, and Georgia, and favors high-quality neighborhoods with infill or infill-adjacent lots.

It's delivering strong growth in a high-interest rate market with revenue up 18.1% to $2.1 billion last year, driving earnings per share up 38% to $8.45.

Additionally, the stock looks like a bargain, trading at a price-to-earnings ratio of less than 7. While the macro environment does present some risks, Green Brick has a proven track record, a strong balance sheet, and a winning strategy.

Over the long term, it looks like a good bet to continue beating the market.

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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Green Brick Partners and Williams-Sonoma. The Motley Fool has a disclosure policy.

2 Under-the-Radar Housing Stocks With Market-Beating Potential was originally published by The Motley Fool

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