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Builder Confidence Appears Firm: 5 Top Housing Stocks to Buy

Zacks Equity Research

Despite being one point lower in November from a month ago, builders’ sentiments for newly-built single-family homes remained strong, thanks to the much lower mortgage/interest rates and continued job growth.

Notable homebuilders like M.D.C. Holdings, Inc. MDC, D.R. Horton, Inc. DHI, Meritage Homes Corporation MTH, NVR, Inc. NVR and PulteGroup, Inc. jumped 2.2%, 2.1%, 1.8%, 1.6% and 1.5%, respectively, on Nov 18, following the news.

Let’s Delve Deeper

Per the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), confidence level among builders slipped one point to 70 in November from 20-month high October reading of 71. Notably, the November reading marked the second highest reading since June 2018.

Meanwhile, a gauge of present sales conditions fell two points to 76 from October. Traffic of prospective buyers also dropped one point to 53 but sales predictions for the next six months grew one point to 77.

The three-month moving averages for regional HMI reading were bright for Northeast, West and South. While Northeast reported two-point gain to 62, West increased three points to 81 and South rose one point to 74 from the prior-month figures. However, Midwest remained unchanged at 58.

Solid Prospects of Housing Industry Despite Challenges

The U.S. housing industry’s prospects for the upcoming quarters appear bright, given extremely low mortgage rates, the Fed’s dovish stance, steady economic growth and favorable demographics.

In the recent Primary Mortgage Market Survey report published by Freddie Mac, the 30-year, fixed-rate mortgage average declined to 3.75% from the previous year’s 4.94%, despite increasing six points from a week ago. Mortgage purchase applications for the week ending Nov 8 increased 9.6% from the prior week, per the Mortgage Bankers Association (MBA) Weekly Mortgage Applications Survey.

This positive momentum that the housing industry is currently experiencing can be substantiated by its share price performance. The Zacks Building Products - Home Builders industry has outperformed the broader S&P 500 in the past year, growing 44.6% compared with the latter’s rally of 17.4%.

Without any doubt, construction companies have for long been grappling with trade war-driven increase in raw material costs, rising freight expenses, higher incentives to drive sales and other affordability headwinds. These, along with higher land/labor costs, might have weighed on margins of many companies in the construction space, thereby hurting their bottom line to some extent.

Nonetheless, demand among home buyers remains strong. Homebuilders are also starting to offer less pricey homes to mitigate the risk of affordability. Per the National Association of Home Builders (NAHB)/Wells Fargo Housing Opportunity Index (HOI) recent report, housing affordability rose to its highest level in three years in the third quarter of 2019, given above-mentioned tailwinds.

Overall, 63.6% of new and existing homes sold between the beginning of July and end of September were affordable to families earning the U.S. median income of $75,500. This is up from the 60.9% in the second quarter of 2019 that were affordable to median-income earners and slightly higher than first-quarter reading of 62.6.

Market pundits are also of the opinion that the healthy job market, faster wage growth, moderating price gains and lower mortgage rates will certainly generate more sales

Top Five Housing Picks

The housing industry is expected to do well in the coming quarters. Also, lower mortgage rates and home prices make the outlook for the industry bullish.

Therefore, picking right stocks from the Zacks Construction sector will be a smart investment option at this point. This is where our Zacks Stock Screener comes in handy.

We have shortlisted few housing stocks that have a Zacks Rank #1 (Strong Buy) or 2 (Buy) and other relevant metrics. You can see the complete list of today’s Zacks #1 Rank stocks here.

KB Home KBH: KB Home is one of the largest and recognized homebuilding company in the United States, which primarily focuses on first-time and first move-up, as well as second move-up and active adult homebuyers. The company currently sports a Zacks Rank #1.

Earnings estimates for fiscal 2019 are currently pegged at $2.86 per share, indicating 67.3% improvement year over year. Also, for fiscal 2020, earnings estimates of $3.46 reflect 20% growth. Its earnings are expected to increase 9.3% over the next five years.

M/I Homes, Inc. MHO: This leading builder of single-family homes currently sports a Zacks Rank #1. Earnings for 2019 and 2020 are expected to witness 31.9% and 12.1% growth, respectively, year over year.

TopBuild Corp. BLD: Headquartered in Daytona Beach, FL, TopBuild is an installer and distributor of insulation and other building products within United States. The company currently sports a Zacks Rank #1.

Earnings for current year are expected to grow 28.4% year over year. Also, it is expected to witness earnings growth rate of 28% in the long term.

Meritage Homes Corporation: This leading national homebuilder primarily engages in the construction and sale of single-family houses both in the entry-level and move-up markets. The company currently sports a Zacks Rank #1.

Earnings for 2019 and 2020 are expected to grow nearly 2% and 20.6%, respectively, year over year. It has three-five year expected earnings growth rate of 8.5%.

NVR, Inc.: Headquartered in Reston, VA, the company constructs and sells single-family detached homes, townhomes and condominium buildings. It currently carries a Zacks Rank #2.

The company has a three-five year expected earnings growth rate of 10.9%

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