Despite a US equities market trading at lofty valuations, homebuilding stocks remain some of the cheapest on the market. Perceptions of a rising rate environment tend to decrease mortgage demand and limit home orders, creating expectations of diminished earnings ahead, which in turn decreases stock prices.However, I believe that the US Federal Reserve will have issues hiking up to three times in 2017, as many of the structural headwinds to growth and inflation in the US are still present. These factors include underutilization of the world’s productive resources (e.g., oil, with supply continuing to outstrip demand), industrial overcapacity in larger developing Asian economies such as India and China, unsustainably large public debt scenarios in various developed economies that limit forward growth prospects, and an overall slowdown in globalization. On top of that, 8-9 years of ultra-low rates have worked to pull forward a large amount of growth into the future at the expense of the future.Based on my personal projections of D.R. Horton (DHI), the largest homebuilder in the US with a presence in 26 states and 78 different markets, the company trades at 10.5%-11.0% forward returns expectations based on its current price of $28.50 per share. This is a rarity in this market, where many companies are trading at around 5%-7% forward returns.Discounted at a 10% cost of equity (i.e., expected returns), I have the company trading at about $32 per share at the median. If the valuation range is created by adjusting the long-run growth rate of the economy by +/- 30 bps and the cost of capital by +/- 100 bps, the valuation range comes to $26-$40 per share.In terms of capital structure, the company is also lightly levered, with a debt-to-capital ratio of only 23%-24%. This is among the lowest in the industry and provides flexibility going forward.In terms of potential cap structure adjustments on share prices:I am long DHI and Lennar’s B class shares (LEN.B). (Lennar is the second-largest homebuilder in the US and I remain biased toward the larger players in the industry due to the importance of scale in homebuilding.)However, for now, I am not expecting anything out of these companies and keeping the position relatively small. Homebuilding is out of favor and I don’t expect the mood to improve in the industry unless homebuilding gets a boost from a continued low interest rate environment.Horton, specifically, could receive a boost due from the federal housing agencies loosening up their mortgage underwriting practices to better accommodate first-time homebuyers, a niche that the company has a competitive advantage in relative to peers.