What does falling mortgage rates mean for home builder stocks? Jay McCanless, Housing Analyst at Wedbush Securities, joins Yahoo Finance to discuss why he is less bullish on home builders and to shed light on one under-the-radar stock: Cavco Industries (CVCO).

McCanless illuminates that Cavco "sells affordably priced homes. According to the Manufactured Housing Institute, the average price of a single section home was $70,000 in '22, and $210,000 for a double section home. You compare that where existing home prices are on a median basis at almost $330,000 in the US. Cavco is a name that sells an affordable payment, which is what the manufactured housing buyers are typically looking for. We also think the balance sheet of this company, which is all, a net cash balance sheet, significantly net cash balance sheet, gives them the staying power to weather some of the mortgage rate fluctuations that the manufactured housing market saw in '23, just like the site-built housing market saw."

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Editor's note: This article was written by Nicholas Jacobino

Video Transcript

JOSH LIPTON: I'm interested, Jay. You know, the Fed is expected to cut rates this year. And, you know, I would think, Jay, that's a pretty great, bullish tailwind for this sector just in terms of lifting sales and margins. You know, builders can reduce the incentives. So is your point just simply, OK, that's a tailwind, but it's just simply priced in at these levels?

JAY MCCANLESS: Yeah, I think that's part of it. I think the other side of it is that even though there is the potential for rate cuts out there, in terms of the actual effect on the 30-year mortgage rate, the 30-year mortgage rate has only come down, as of where the numbers are today, only about 100 bips. So homes are slightly more affordable than they were but much more expensive than they were, say, a year ago or even two years ago. And we feel like with, again, the move this group has had, we've priced in a lot of that good news. And if we do see-- and I think probably the risk to our more cautious view is that if mortgage rates do finally start to come down at some point, that will pull more people back in, potentially can make our numbers be a little conservative. But right now with mortgage rates kind of stuck at 7%, just don't see a reason to get overly bullish on the space at this point.

JULIE HYMAN: That said, there are some names that you like within home builders, and one of them is one that I wasn't as familiar with, and, as you point out, it's not as popular. It's a company called Cavco that does factory-made housing. Why is that one more attractive?