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On Apr 2, Zacks Investment Research upgraded national homebuilder, D.R. Horton Inc. (DHI - Analyst Report) to a Zacks Rank #1 (Strong Buy), following solid fundamentals of the overall housing market.

Why the Upgrade?

D.R. Horton has been witnessing rising earnings estimates ahead of its fiscal second-quarter results later this month. We believe that the estimates are rising on the back of solid momentum in the housing market and a bright outlook for the to-be-reported quarter due to the spring selling season.

D.R. Horton is witnessing significant growth in both volumes and selling prices driven by substantial improvement in demand across all markets. The stability in the home buying market, combined with low interest rates and increased rentals have increased the affordability of homes. Moderate job growth and slowly increasing consumer confidence are also contributing to a rise in demand for new homes. Inventory of foreclosed homes and short sale homes is declining, thus stabilizing the prices of new homes. Thus, homebuilders are witnessing an increased traffic level due to heightened consumer demand. Home prices have started moving up lately with market demand gaining momentum. Moreover, new home orders, backlogs and homes have been increasing in double-digit percentages. In fact, this homebuilder has beaten the Zacks Consensus Estimates for earnings over the past four quarters.

The pace of the company’s investments in homes under construction, land development and finished lots has also increased following the improved liquidity position from solid sales growth in 2012. The company had 14,200 homes and 60,000 finished land lots in inventory at the end of the first quarter of 2013, which positions it well to capture the increased demand during the spring selling season in the second quarter.

If market conditions remain stable, management expects the company’s profitability to increase in 2013 and thereafter. This is expected to be driven by its solid balance sheet and improved liquidity position allowing it to re-invest in growth opportunities; increased pricing power; rising homes inventory and improving land position.

Other Stocks to Consider

Many housing companies have favorable Zacks Ranks due to the solid fundamentals of the overall homebuilding market. Some worth mentioning include Ryland Group Inc. (RYL - Snapshot Report) – Zacks Rank #1 (Strong Buy), KB Home (KBH - Analyst Report) -Zacks Rank #2 (Buy) and Consorcio ARA, S. A. B. de C. V. - Zacks Rank #2 (Buy).

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