The housing market has seen some volatility with mortgage rates as high as 8%, homebuyers pulling out of the market, and inventory remaining low. Despite this, homebuilder stocks have seen an upside in the market. John Lovallo, UBS Homebuilders & Building Products Analyst, joins Yahoo Finance to discuss his take on the housing market and his homebuilding stocks outlook for 2024.

In terms of interest rates, Lovallo said, "We believe that the higher interest rate environment, and who knows where rates go, but let's just say they're higher for longer, is going to cause continued sort of incentivisation which will weigh on margins next year. Now to be perfectly clear, we expect margins to remain above historical levels, but maybe trend down off of today's sort of mid teens. If that is the case, you will see some normalization in returns, but, let's be clear, even on our estimates that are 15% below our sale side competitors, stocks looks compelling from a valuation standpoint."

Click here to watch the full interview on the Yahoo Finance YouTube page or you can watch this full episode of Yahoo Finance Live here.

Video Transcript

JULIE HYMAN: Well, it has been a brutal housing market for homebuyers between a lack of inventory, high prices, and high mortgage rates. But that doesn't seem to be affecting some of the homebuilder stocks. Joining us now is John Lovallo, UBS Homebuilders and Building Products Analyst, to talk about the outlook for this space.

So John, I wanted to start big picture here, right, because the homebuilders have been in an interesting position because of the tightness of the market. There seems to be a lot of demand for new inventory. So have we seen sort of a rising tide for all of the homebuilders as of late?

JOHN LOVALLO: Yeah. Julie, thanks for having me, first of all. I think that's exactly right. The environment out there today is such that there is very little existing home supply. Think about it, mortgage rates went from 3 and 1/4 up to almost 8% a month ago. They've trailed back about 90 basis points since then but are still at very high levels. And when you put that in the context of something like 80% of mortgages in the US being struck at 5% or below and almost 60%-- 4% or below, that's created this lock-in effect where people don't want to move. They can't make that math work.

And surprisingly, demand, overall, demand has remained resilient. So the extent that someone wants to buy a home today more than at any point in history, they've been forced to look at new homes. And I think when you couple that with the fact that the new homebuilders on the public side have the ability to offer a lot of attractive financing options, that has created a lot of market share wins for the public homebuilders and, to your point, has created this sort of rising tide, lifts all boats for the public.