Despite recession concerns and higher construction costs from tariffs, the U.S. housing market remained strong in Q1 2025, driven by tight inventory and solid buyer demand. 

Although mortgage rates hovered around 6.8%, first-time buyers remained active, and the market continues to face a significant shortage of approximately 3.8 million homes. 

NVR (NVR) stands out among homebuilders with its low-risk, asset-light strategy of using land options rather than speculative buying, which has allowed it to maintain robust profitability and steady growth despite market challenges.

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Even as the economy flirts with recession risks and builders grapple with higher costs from tariffs, housing demand remained firm in the first quarter of 2025.

Sales of new single-family homes reached a seasonally adjusted annual rate of 724,000 units in March, near the highest pace since early 2022.

Existing-home transactions ran at a 4 million-unit pace, down only 2.4% year-over-year, yet still commanded a record median price of $400,000.

Inventory remains exceptionally tight with 1.3 million unsold homes on the market equating to just four months of supply, well below the six-month balance that signals a neutral market

Mortgage rates have hovered near 6.8% on a 30-year fixed loan, testing affordability but not deterring buyers.

Tariffs on imported building materials have added roughly $7,500 – $10,000 to the cost of constructing each home, and those costs are being passed through without derailing sales.

First-time buyers accounted for 32% of purchases in March, matching year-ago shares and showing broad-based demand.

Underlying these dynamics is a persistent supply gap. The market remains short by about 3.8 million homes relative to long-run needs, keeping competition intense and prices buoyant.

This imbalance shows that the core demand for housing is holding strong despite macroeconomic headwinds.

One homebuilder well suited to benefit from the current environment is NVR (NVR).

The company is different from other large homebuilders like D.R. Horton (DHI) and Lennar (LEN).

NVR is close to a pure-play home builder. While the firm has a mortgage banking arm as well, it does not take part in community development and infrastructure building like its competition.

Instead, the company solely builds homes on plots in communities that are ready to develop.

NVR accomplishes this through an intelligent strategy of using options. Other homebuilders buy large swaths of land speculatively, hoping to develop later if the land price appreciates.

While this can lead to large gains, it is also risky.

On the other hand, the company pays landowners a deposit for roughly 10% of the value of a lot of land.

NVR then has the right to buy the lot for a set price for a certain amount of time. If it does not buy the land, it loses the deposit.

If the firm pursues the plot, it can end up with a significant profit after building on it.

This conservative strategy is safer and protects the firm during downturns.

Additionally, the strategy allows the NVR to stay more asset-light than other homebuilders.

This shows up immediately in NVR’s balance sheet. Negligible long-term debt relative to revenue, and capital spending that runs at a fraction of industry averages.

With fewer dollars tied up in land and development, the company keeps its capital expenditures light.

It then puts excess cash to work by repurchasing shares rather than chasing growth through risky land bets.

Since 2014, management has cut the share count by more than 20%, boosting each remaining owner’s claim on profits without raising leverage.

That disciplined capital allocation fuels consistent net income growth. 

Over the last decade, NVR’s earnings have climbed at a double-digit pace in most years, even when interest rates crept higher or material costs rose.

And because the company isn’t rolling cost-plus projects into a backlogged inventory of speculative lots, it avoids markdowns or write-offs when orders slow.

Instead, it meters its land buys to match signed orders, giving it a clear view of margins before it pulls the trigger.

All these factors combined enabled NVR to achieve 46% Uniform return on assets ”ROA” and 15% asset growth last year.

Despite this strong performance, the market worries that a further uptick in rates could sap buyer interest and expects the company’s returns to decline in the coming years.

Our EEA model clearly shows this.

The EEA starts by looking at a company’s current stock price. From there, we can calculate what the market expects from the company’s future cash flows. We then compare that with our own cash-flow projections.

In short, it tells us how well a company has to perform in the future to be worth what the market is paying for it today.

At the current stock price, the market expects the firm’s Uniform ROA to decline to 27% from 46% last year.

Even with mortgage rates near multi-year highs, the housing shortage of about 3.8 million units is a tailwind for builders who can deliver efficiently.

NVR’s foothold in fast-growing East Coast markets from Washington and Northern Virginia down through Atlanta and the Carolinas puts it where demand remains strongest.

Its cost-plus contracts let it adjust prices in line with input costs, so it passes through lumber, labor and materials increases without eroding its margin structure.

If orders slow, the company simply scales back land draws rather than pushing debt onto its books.

When sales volumes pick back up, it can snap up lots quickly under existing options, capturing rising prices and restoring a healthy backlog.

Trading at just 16x Uniform earnings, NVR offers an opportunity for investors betting on the U.S. housing market.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research