Find Solace in U.S. Housing: 5 Top Stocks to Buy

Amid the coronavirus threat, slowing consumer spending and weak business investment, the streak of positive housing data should bring solace to weary investors. Although U.S. housing starts for January were below the December level, permits surged to a near 13-year high, pointing toward sustained housing market strength amid lower mortgage rates.

According to the Commerce Department data released on Feb 19, housing starts dropped 3.6% from the prior month to a seasonally adjusted annual rate of 1.567 million units in January, following three straight monthly increases. Nonetheless, the January figure rose 21.4% on a year-over-year basis and surpassed analysts’ expectation by 10.6%. January housing starts for single family decreased 5.9% but were up 3% for multifamily structures. The drop in housing starts on a monthly basis is a reflection of larger-than-anticipated jump in construction activities in December owing to warmer weather. The December reading marked the highest level since December 2006.

Residential building permits, an indicator of future construction activity, leaped 9.2% month over month in January to an annualized rate of 1.551 million units — the highest since March 2007. This upside was led by gains in both single- (up 6.4%) and multi-family housing (up 15.2%) segments. The January permit level surpassed analysts’ expectation by 6.3% and was 17.9% higher year over year.

Trends to Rule Housing

Although the Fed does not control mortgage rates, any movement in the federal funds rate might impact the same. According to the minutes released from the Federal Open Market Committee’s Jan 28 and 29 meeting, policymakers voted to leave its benchmark overnight funds rate between 1.5% and 1.75%, mainly to support a recovery in business investment and labor market.

The group “expected economic growth to continue at a moderate pace.” Members also noted that the outlook for the economy has grown “stronger” than the previous December forecast.

Officials in the meeting mentioned that some trade uncertainties have diminished recently and there were some signs of stabilization in global growth. For most part of 2019, the committee had worried about the steep decline in business investment, in view of the U.S.-China trade spat. At its latest meeting, Fed policymakers were somewhat confident that investment would recover this year, given that a preliminary trade deal between the United States and China is already in place.

However, outlook still appears gloomy as trade-related woes are not fully resolved, including those posed by the outbreak of coronavirus. Additionally, manufacturing remains slow and business investment is still weak. Although there have been some signs of a rebound as the January’s ISM manufacturing index grew for the first time in six months, but the spread of the coronavirus may dismiss all the benefits derived from a temporary trade truce between the United States and China.

Despite various uncertainties that are looming on economic expansion, builder confidence in the market for newly-built single-family homes remains solid. According to the National Association of Home Builders’ monthly Housing Market Index released on Tuesday, builder confidence fell by only one point. Nonetheless, the last three monthly readings mark the highest sentiment levels since December 2017.

A Snapshot of Recent Mortgage Rates & Applications

Low mortgage rates and a solid labor market are aiding residential construction, which hasn’t contributed to economic growth since the end of 2017. In the recent Primary Mortgage Market Survey report published by Freddie Mac, the 30-year, average fixed-rate mortgage edged up to 3.47% from 3.45% last week, following three straight weeks of decline. The rate was 4.37% a year ago. The average rate on a 15-year mortgage was unchanged from last week at 2.97%.

Separately, mortgage applications for new home purchases for the month of January increased 35.3% on a year-over-year basis, per the Mortgage Bankers Association (MBA) Builder Application Survey. The applications increased 40% from December.

All these certainly paint a realistic picture of the U.S. housing market, which accounts for about 3.1% of GDP. The industry remains on solid footing, backed by historically low mortgage rates, thereby helping to sustain the longest economic expansion on record.

In words of Joel Kan, MBA's Associate Vice President of Economic and Industry Forecasting, "Even with some global and domestic economic uncertainty, builders have ramped up production in recent months to meet increased homebuyer demand."

Stocks to Bet On

Adding some homebuilding stocks, which have been cashing in on the positive market dynamics, looks like a smart move at this point. Notably, the homebuilding industry is in the top 13% of the Zacks Industry Rank.

However, picking winning stocks is no mean feat. With the help of the Zacks Stock Screener, we have zeroed in on five stocks that have a Zacks Rank #1 (Strong Buy) or 2 (Buy) and favorable metrics. You can see the complete list of today’s Zacks #1 Rank stocks here.

D.R. Horton, Inc. DHI is engaged in the construction and sale of high-quality homes through a diverse brand portfolio. This Zacks Rank #1 company’s earnings estimates for the current year have moved 7.8% north over the past 30 days. It has an expected EPS growth rate of 23.1% for fiscal 2020.

The company is well positioned for fiscal 2020, courtesy of industry-leading market share, solid acquisition strategy, a well-stocked supply of land, lots and homes, along with affordable product offerings across multiple brands. Net sales orders at fiscal first-quarter end increased 19% year over year in units and 22% in dollar value, depicting its revenue growth potential.

M.D.C. Holdings, Inc. MDC, also a Zacks Rank #1 stock, mainly engages in the construction and sale of single-family detached homes to first-time and first-time move-up homebuyers. Earnings estimates for 2020 have moved up 3.6% over the past 30 days. Earnings are expected to grow 17.2% in 2020.

The company’s sales environment continues to be favorable, as is evident from 49% growth in unit orders in fourth-quarter 2019. It highlighted that this demand trend will continue in 2020, in turn lending strong momentum to its business as it heads into the spring selling season.

PulteGroup Inc. PHM, sporting a Zacks Rank #1, engages in homebuilding and financial services businesses, primarily in the United States. Earnings estimates for 2020 have moved up 5.4% over the past 30 days. Earnings are expected to grow 17.2% in 2020.

PulteGroup remains focused on growing demand for entry-level homes, addressing the need for lower-priced homes, given affordability concerns prevailing in the U.S. housing market. A 33% year-over-year increase in fourth-quarter 2019 order growth was attributed to 57% surge in first-time buyer orders. Consistent with orders, it has been realizing higher absorption rates across its entire portfolio.

Century Communities, Inc. CCS, carrying a Zacks Rank #2, engages in the design, development, construction, marketing, and sale of single-family attached and detached homes. Earnings estimates for 2020 have moved up 10.3% over the past 30 days. Earnings are expected to grow 11.1% in 2020.

The company is well positioned for 2020, considering its focus on expanding its differentiated leadership position in the attractive, lower-priced home category. Net new home contracts increased 45% to a record 1,775 homes in the fourth quarter of 2019.

KB Home KBH, which also carries a Zacks Rank #2, is a well-known homebuilder in the United States and one of the largest in the state. Earnings estimates for 2020 have moved up 1.7% over the past 30 days. Earnings are expected to grow 29.1% in 2020.

With the Returns-Focused Growth Plan in place, revenues and operating margin are expected to significantly improve in the near future. Notably, it is well positioned for fiscal 2020, given solid backlog level ($1.81 billion in fiscal first-quarter 2020).

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