Rising Costs And Demographic Shifts Will Bleed US Housing Value

Key Takeaways

• Persistent housing affordability issues and unfavorable demographic shifts are reducing demand for Meritage's core entry-level homes and limiting future growth opportunities.
  
• Elevated costs, geographic overexposure, and evolving consumer preferences are compressing margins and increasing risks to long-term profitability and market stability.
  
• Strong demand for affordable homes, demographic tailwinds, operational agility, Sunbelt expansion, and financial flexibility collectively position Meritage Homes for resilient growth and market share gains.

Catalysts

Designs and builds single-family attached and detached homes in the United States.

• Sustained elevated mortgage rates and overall affordability pressures are causing persistent softness in homebuying demand, particularly in the entry-level segment, which makes Meritage highly vulnerable to further revenue declines as the pool of qualified buyers shrinks and incentives must remain elevated to drive sales.
  
• Slowing U.S. population growth and an aging demographic profile threaten the long-term growth of household formation, structurally capping the volume of new home demand and directly limiting Meritage's future revenue and market expansion opportunities.
  
• Rising land development and regulatory costs, exacerbated by persistent climate change compliance requirements, are keeping the company's cost basis elevated; with limited relief expected before late 2026 at best, this dynamic will continue to compress gross margins and erode net earnings power.
  
• Meritage's overconcentration in Southern and Western U.S. markets increases vulnerability to regional economic slowdowns, adverse climate events, and localized regulatory shifts, all of which could create pronounced volatility and downside in future revenues and margin stability.
  
• Structural shifts towards alternative homeownership models, increased consumer preference for urban rentals, and the spread of disruptive building technologies threaten to permanently reduce demand for traditional single-family homes, putting downward pressure on Meritage's future sales volumes, average selling prices, and long-term earnings potential.

Meritage Homes Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Meritage Homes compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Meritage Homes's revenue will grow by 4.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 10.3% today to 6.8% in 3 years time.
• The bearish analysts expect earnings to reach $482.8 million (and earnings per share of $6.97) by about September 2028, down from $638.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 10.8x on those 2028 earnings, up from 8.8x today. This future PE is lower than the current PE for the US Consumer Durables industry at 11.5x.
• Analysts expect the number of shares outstanding to decline by 1.66% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.12%, as per the Simply Wall St company report.

Meritage Homes Future Earnings Per Share Growth

Risks

• The persistent shortage of U.S. housing supply, particularly in entry-level and affordable homes, continues to support strong demand for new-builds, which could underpin steady or increasing revenues for Meritage Homes even in a challenging macro environment.
  
• Favorable long-term demographic trends, with Millennials and Gen Z entering peak home-buying years, are set to expand Meritage's addressable market and provide a consistent demand driver, which could raise sales volumes and top-line growth over time.
  
• Meritage's strategic focus on entry-level and first move-up buyers, combined with operational agility-such as maintaining move-in ready inventory and rapid cycle times-positions it to capture outsized share in the most resilient housing segments, helping to stabilize revenues and gross margins despite near-term affordability concerns.
  
• Continued expansion in high-growth regions, like the Sunbelt, and double-digit community count growth through 2026, as discussed by management, enables increased market share capture and the potential for sustained revenue and earnings growth even as market cycles fluctuate.
  
• Robust financial flexibility, exemplified by a healthy balance sheet, low net debt to capital, and opportunistic share repurchases, allows Meritage to invest in land, return capital to shareholders, and withstand temporary downturns, supporting net earnings and shareholder returns over the long term.

Valuation

• The assumed bearish price target for Meritage Homes is $60.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Meritage Homes's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $107.0, and the most bearish reporting a price target of just $60.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $7.1 billion, earnings will come to $482.8 million, and it would be trading on a PE ratio of 10.8x, assuming you use a discount rate of 9.1%.
• Given the current share price of $78.57, the bearish analyst price target of $60.0 is 30.9% lower.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.