Home Sales Near 2-Year High Despite Supply Woes: 5 Picks

U.S. existing-home sales wrapped up 2019 on a solid note. Sales of previously-owned homes attained the highest level in December since March 2018, despite running out of adequate level of inventory. According to the National Association of Realtors (“NAR”), existing-home sales grew 3.6% in December versus a marginal fall registered in November. Notably, the metric surpassed market expectations by more than 2%.

Undeniably, lower mortgage rates, solid job market and resilient consumer confidence helped the housing market to regain its footing after being hit hard in 2018. Notably, shares of a few industry players like Hovnanian Enterprises, Inc. HOV, Taylor Morrison Home Corporation TMHC and Beazer Homes USA, Inc. (BZH) grew 2.5%, 1.8% and 1.3% on Jan 22, 2020, post the release of existing-home sales data.

However, record low inventory level continues to be a significant headwind that is affecting prospective buyers, especially first-timers. “Home sellers are positioned well, but prospective buyers aren’t as fortunate. Low inventory remains a problem, with first-time buyers affected the most.” NAR’s chief economist, Lawrence Yun, said.

Solid December Readings

On Wednesday, the NAR stated that existing home sales — which account for more than 90% of total U.S. home sales — increased 3.6% in December to a seasonally adjusted annual rate of 5.54 million units from November’s 5.35 million. Also, sales were up 10.8% from 5 million units reported a year ago.

Regionally, Northeast sales — which account for the majority of existing home sales — grew 5.7% to 740,000 units from a month ago and 8.8% from the prior-year period. Sales in the West and South also rose 4.6% and 5.4% from a month ago, respectively. On a year-over-year basis, the regions reported growth of 10.7% and 12.4%, respectively. Although sales from the Midwest declined 1.5% from November 2019, the same improved 9.2% from the December 2018 level.

Median sales price in the month rose 7.8% from the comparable year-ago period to $274,500, marking the 94nd straight month of year-over-year increase. Median home prices grew in all regions, with the strongest price gain recorded in the Midwest.

20-Year Low Inventory Restrains Growth

Total housing inventory at the end of December was 1.4 million units, down 14.6% from November readings and 8.5% from the prior-year period. Moreover, it will take just three months to deplete the current supply of homes, down from 3.7 months noted in both November 2019 and December 2018.

Discouragingly, unsold inventory has dropped for seven consecutive months, taking a toll on housing market growth. Though the overall housing market is exceeding market expectations on major data points — given below 4% mortgage rates (from its peak of 4.94% in November 2018), solid job market and three interest rate cuts in 2019 — supply-side headwinds are still suppressing the growth trajectory.

In December, first-time buyers were responsible for 31% of sales, down from 32% registered in November and December 2018.

Nonetheless, NAR’s president Vince Malta expects 2020 to be a solid year for housing. The U.S. housing market, accounting for nearly 3.1% of the economy, plays an important role in the evaluation of overall economic growth. Per a report from the National Association of Home Builders, the housing share of GDP rose for the first time in six quarters to 14.6% in third-quarter 2019. The Zacks Building Products - Home Builders industry has jumped 49.5% in a year’s time, outperforming the broader S&P 500 composite’s 27.7% rally.

5 Top Picks

Based on the aforementioned discussion, let us focus on a handful of housing stocks that are performing well in recent times and will continue the same in the future.

KB Home KBH: This leading homebuilding company currently sports a Zacks Rank #1 (Strong Buy). Earnings for fiscal 2020 are expected to grow more than 27% year over year. It has a long-term expected earnings growth rate of 10.9%. In the past year, the company’s shares have gained 95.8%. You can see the complete list of today’s Zacks #1 Rank stocks here.

M/I Homes, Inc. MHO: This leading builder of single-family homes currently sports a Zacks Rank #1. Earnings for 2020 are expected to grow 13% year over year. Over a year, the company’s shares have soared 87.2%.

Meritage Homes Corporation MTH: This leading national homebuilder primarily focuses on single-family houses in entry-level and move-up markets. Earnings for 2020 are expected to grow 19.2% year over year. The Zacks Rank #2 (Buy) company has three-to-five year expected earnings growth rate of 8.9%. The company’s shares have appreciated 70.2% over a year.

M.D.C. Holdings, Inc. MDC: The company, through its subsidiaries, engages in homebuilding and financial service businesses. Earnings for fiscal 2020 are expected to grow 18.5% year over year. It has a long-term expected earnings growth rate of 9.6%. Shares of this Zacks Rank #2 company have surged 64.8% in the past year.

Lennar Corporation LEN: This leading national homebuilder currently carries a Zacks Rank #3 (Hold). Earnings for fiscal 2020 are expected to increase 7% year over year. It has a long-term expected earnings growth rate of 10.4%. Notably, the company’s shares have risen 40.7% in the past six months.

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