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Low Mortgage Rates Put Housing Stocks Back on Possession Track

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Mortgage rates, which are one of the major influencing factors in home purchases, hit the rock bottom in a near 50-year history.

Per the government-sponsored enterprise Freddie Mac survey, for the week ending May 28, the 30-year fixed-rate mortgage at 3.15% again touched the approximate 50-year low, thereby breaking the record for the third time in just a few months.

Low Mortgage Rates Propel Home Hunting

These unprecedented low mortgage interest rates led to an 8% increase in purchase demand as of last week. This is a sharp rebound from a 35% year-over-year decline in house-buying demand in mid-April. Given the coronavirus-induced contraction in the economy, this turnaround in home purchase holds promises for the future.

Additionally, homeowners with strong credit histories are resorting to refinance activity to take advantage of the current low mortgage rates. This means a broader base of borrowers is gaining traction from the record benign rate environment by lowering their interest outgo. This broad-based customer participation is sure to boost the economy.

Also this decline in the mortgage rates is here to stay which will continue to support the housing market. Researchers at Realtor.com predicted that average rates "may slide under 3% by the end of the year,"

Also, the gradual easing of lockdown fuelled home purchase mortgage applications over the past six weeks. According to the Mortgage Bankers Association (MBA) data, applications were up 9% over the previous week and 54% over their level in early April.

Demography to Further Buoy Demand

The housing market expansion will be further supported by millenials or the Gen Y, a majority of whom will be turning 30 this year, thus making it an apt age to own a home. This, in turn, should spur demand for new mortgages.

Recent Upbeat Data

The recent low mortgage rates also surged the sales of newly-constructed single-family homes, accounting for roughly 10% of all U.S. home sales. Sales inched 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%.

Gradual lifting of lockdown restrictions, a positive reading on consumer confidence index, the recovery in Texas factory activity and services industries in the mid-Atlantic region point to a steadily improving economic scenario, which is a positive for the housing industry. (read more: April's Sales Rise Hints at Housing Comeback: Stocks in Focus)


Notably, the Zacks Building Products - Home Builders industry has risen 18.9% in a month compared with the Zacks Constructionsector and the S&P 500 composite’s respective rallies of 10.7% and 4.19%.



Keeping this in mind, we zero in on four stocks, which should be beneficiaries of the recuperating housing industry:

KB Home (KBH - Free Report) , carrying a Zacks Rank #2 (Buy), builds homes across the United States with focus on the Sunbelt markets. The builder operates with four homebuilding segments and one financial services unit. For the current quarter, the company’s earnings are expected to grow 15.7% against the industry’s decline of 9.4%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.


D.R. Horton, Inc. (DHI - Free Report) is cruising to stability in its business. Its shares have gained 6% year to date, outperforming its industry average. This Zacks Rank #3 (Hold)  stock’s earnings for 2020 are expected to grow 6.53% versus its industry’s decrease of 16.8%.

Meritage Homes Corporation (MTH - Free Report) saw a catch-up in sales during the second half of April. Its shares have jumped 16.4% year to date against the industry’s 5.6% dip. Estimates for this Zacks #3 Ranked stock’s 2020 earnings have witnessed an upward revision of 14.5% in the past 30 days, reflecting analysts’ optimism on the company’s prospects. 

Lennar Corp. (LEN - Free Report) , a #3 Ranked player, is engaged in the sale and construction of single-family attached and detached homes as well as the direct purchase, development and sale of residential lands. For the current quarter, the company’s earnings are expected to grow 7.69% against its industry’s fall of 10.58%.

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