UBS US Homebuilders & Building Products Equity Research Analyst John Lovallo joins Yahoo Finance Live to discuss US housing market conditions for homebuilder stocks and housing demands.

Lovallo expects incentive pull-backs from homebuilders towards the spring, if mortgage rates remain the sameL “I think there’s going to be an opportunity to take their foot off the gas if rates... stay in the range that we're in right now.”

Lovallo is looking at migration trends and home turnover rates from Baby Boomers in the sector which will benefit many homebuyers, and expects these stocks to perform well and “allow them [homebuilders] to command a higher multiple than they do today.”

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Eyek Ntekim

Video Transcript

SEANA SMITH: My question to you is about incentives because that has certainly been a story that we have been following very closely. Home builders offering incentives to buyers here in order to boost some of that demand and some of their sales. Are we going to see the strategy there shift at all? Are we going to see maybe a pullback in incentives? And what do you think that looks like?

JOHN LOVALLO: It's a great question, Seana. Yeah. I think there is the opportunity for the builders, given that rates are now lower, to, at least, lessen the degree of incentivization that they're using. And that would be very accretive to gross margin.

Now, again, this is a very critical point in the home building year, if you will, as we head into the spring selling season, which typically happens the Monday after the Super Bowl Sunday. And so at this point, builders are going to keep the incentives in place. Let's see how the spring selling season starts. But I think that there is going to be an opportunity to take their foot off the gas, if rates stay in the range that we're in right now.

BRAD SMITH: When we had previously had a conversation with Meredith Whitney on our air, who laid out two major factors to this home buying market more broadly or the housing sector more broadly. And it was needing to see a silver tsunami, a wave of boomers, perhaps, who were willing to relist their homes. And then additionally, into the buying side of that equation, a number of migrations that potentially could take place as well. What are some of the two big themes, perhaps, that you are going to be watching for here in order to say, OK, it's a green light, back in this housing sector, despite rates being elevated from the levels that were extremely rosy for buyers and sellers?

JOHN LOVALLO: Yeah. I think it's a great question. One from the in-migration standpoint. Yes, very important. If you think about where the public builders, in particular, build their building in the Golden Horseshoe or the Sunshine States, where the migration is coming because there's job growth. And frankly, the weather's better. And so there's been a lot of movement into those areas.

I also think that the baby boomers turning over more homes will be helpful. We have a very strong wave of demographics coming in from the millennials. And Gen Z generation becoming first time home buyers. I think, though, a couple of things to keep in mind here. One, this group is still-- is set up to really perform throughout a cycle. And I think this is what's being missed in the market with the stocks is that these are viewed as stocks that have historically been poor stewards of capital. Land speculators that would have put a home on the land ultimately just to monetize it. But now, you're looking at companies that have solid balance sheets, that have outsized market share gains because there's no existing home inventory, the ability to generate solid cash flow throughout a cycle.

There's a lot of things to like about these stocks, which I think, over time, is going to allow them to command a higher multiple than they do today. They're trading at a 13 turn discount to the S&P, which, in our opinion, is just way too wide given the return profile.