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After a Rough First Quarter, Homebuilders are Looking Solid Again

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Homebuilder stocks had a sensational run in 2016 and 2017. A strengthening economy, rosy employment picture and rock-bottom mortgage rates combined to create a fairy-tale environment for the companies that create the new homes Americans aspire to live in.  

Thanks to low rates, it had never been easier to afford the home of your dreams.

Then came 2018.  After bottoming near 3.5% in the summer of 2016, the rate on a 30-year conventional mortgage has been on a slow climb ever since and now stands at 4.4%. Expectations for 3 or 4 interest rate hikes this year put a real damper on the homebuilder party and predictably, investors took their gains and headed for the exits.

Yield Curve Flattens

An interesting thing has happened, though.  Despite the fact that the Fed has been steadily raising short term rates for over a year – and new Fed Chief Jay Powell is signaling his intent to continue on this path - the longer-term rates have been stubborn to follow and the yield curve continues to flatten.  

After a steep rise, mortgage rates (which are generally indexed off the 10-year bonds) have flattened of late and it’s time to take a look another look at the recently beleaguered homebuilder stocks. Two homebuilding stocks in particular show signs that the selloff has been overdone and are poised to flex their earnings muscle in the coming year.

KB Home (KB) has seen its stock price tumble almost 25% from recent highs on concerns for the entire sector.  In that same period however, Zacks Consensus Earnings Estimates for 2018 have risen 25%, from $2.15 to $2.69, earning it a Zacks Rank #1 (Strong Buy).  KB homes has grown earnings steadily for the past two years and shows no sign of stopping.  The recent selloff makes it a great value.

Beazer Homes (BZH - Free Report) specializes in energy efficient homes for first time and middle market buyers (a large and growing segment of the market) and has experienced the same steep selloff that has afflicted the sector. Thanks to a strong and steadily improving earnings outlook, it also earns a Zacks Rank #1 (Strong Buy).  

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