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April's Sales Rise Hints at Housing Comeback: Stocks in Focus

Shrabana Mukherjee

Sales of new single-family homes in the United States rose in April when the market had expected the figure to drop for the third consecutive month amid the coronavirus debacle. Does this surprise gain amid the record unemployment rate hint at stabilization of the housing market?

Homebuilding stocks gained strongly yesterday after the news release, with shares of notable homebuilders Hovnanian Enterprises, Inc. HOV, KB Home KBH, Toll Brothers TOL, D.R. Horton DHI, PulteGroup, Inc. PHM, and Lennar LEN gaining 10.03%, 4.06%, 3.93%, 3.39%, 3.09% and 2.8%, respectively. Also, iShares U.S. Home Construction ETF ITB and SPDR S&P Homebuilders ETF XHB, which track the homebuilding industry, rose a respective 3.2% and 3.9%.

Key Takeaways

Sales of newly constructed single-family homes, accounting for roughly 10% of all U.S. home sales, edged up 0.6% in April from the prior month to a seasonally adjusted annual rate of 623,000 units, per data released on May 26 by the Commerce Department. The April figure beat the consensus forecast of 497,000 by 25.4%. Notably, March’s sales pace was revised down to 619,000 units from the previously reported 627,000 units.

Three of four U.S. regions posted month-over-month gains in April, driven by an 8.7% increase in the Northeast and gains of 2.4% in the South and Midwest. The West region, which includes the nation’s most populous state California, dropped 6.3%. The inventory of new homes for sale at the end of April was 325,000, representing a 6.3-month supply.

Meanwhile, the median price for a new home sold last month was $309,900, down 8.6% from a year ago as almost 50% of new homes were sold below $200,000.

Does April Data Show a Temporary Spurt or Recovery?

The U.S. housing market is probably responding to the low interest and mortgage rates despite the record spike in unemployment rate and social-distancing restrictions which have limited sales this spring.

Notably, the U.S. homebuilders turned optimistic in May about housing prospects on low interest rates, withdrawal of stay-at-home orders, rising mortgage applications and gradually increasing buyer traffic (read more: Builders Confidence Up in May: Signs of Revival in Housing?).

Furthermore, the new business model, which focuses on buyers’ need for the time being, i.e. knowledge and access to the homes they are seeking, has been helping homebuilders boost revenues. Builders are now more focused on increasing engagements through social media, virtual tours and online closings.

This April sales data reflects the bright spot of the economy as the country starts to reopen. Additionally, May consumer confidence edged higher after two months of steep declines, further echoing the short-term prospects as businesses gradually reopen.

The improvement in the data was also reflected by a survey by the Dallas Federal Reserve on May 26. The report shows that although Texas factory activity dropped in May, it was slower compared to April's record plunge. Similarly, services industries in the mid-Atlantic region reported a persistent decline in activity, but at a slower pace than the historic slump in April.

A Look at the Recent Mortgage Rates

The 30-year, fixed-rate mortgage averaged 3.24% for the week ended May 21, 2020, according to recent mortgage finance agency Freddie Mac. For the fourth consecutive week, the 30-year fixed-rate mortgage has been below 3.30% that helped potential buyers continue shopping even amid the pandemic.

High Unemployment Rate: A Major Hurdle

A significant rise in unemployment, particularly arising from coronavirus-led shutdowns and stay-at-home orders, is a major headwind. Also, we cannot ignore other challenges that are prevalent in the construction industry that include availability of loans for homebuilders and building materials.

The recent Bureau of Labor Statistics Job Openings and Labor Turnover Survey data reveals that there were 618,000 layoffs in the construction sector in March. The metric was strikingly higher than 202,000 in February and 179,000 in March 2019. Notably, it expects the metric to be higher in the April data, scheduled to be released on Jun 9.

Nonetheless, many economists are of the opinion that when the worst of the COVID-19 economic downturn is behind us, the housing market is expected to rebound, which might aid in bringing the rest of the economy out of the doldrums. The situation was just the opposite last decade, when housing crashed the U.S. economy. Undoubtedly, it would take time for the U.S. housing to get back on its feet amid record unemployment.

Stocks in Focus

Investors can keep an eye on the following housing stocks that are capitalizing on the positive aspects of the industry defying all odds. Notably, the Zacks Building Products - Home Builders industry has improved 20.2% in a month compared with the Zacks Construction sector and S&P 500 composite’s 11.3% and 4.9% rally, respectively.

Meritage Homes Corporation MTH recently announced that sales momentum increased in the last two weeks of April. Its shares have gained 16.4% year to date against the industry’s 5.6% decline. This Zacks Rank #3 (Hold) stock’s estimates for 2020 earnings have witnessed upward revision of 14.5% in the past 30 days, reflecting analysts’ optimism over the company’s growth prospects. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

D.R. Horton recently stated that the company is seeing signs of stabilization, if not improvement as the last two weeks of April were stronger than the preceding four weeks. Its shares have gained 6% year to date, outperforming the industry. This Zacks Rank #3 stock’s estimates for 2020 earnings have witnessed upward revision of 1.3% in the past 30 days.

Williams-Sonoma, Inc. WSM, a multi-channel specialty retailer of premium quality home products, has been benefiting from accelerated online sales trends, which more than offset the lost sales from closed stores. This Zacks Rank #3 stock’s estimates for 2020 earnings have witnessed upward revision of 8.7% in the past 30 days.

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