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Homebuilder Sentiment Hits New High: 5 Solid Stocks to Buy

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Homebuilder sentiment hit a record high in August, signaling that the worst of the economic downturn is probably over. According to the National Association of Home Builders/Wells Fargo Housing Market Index, confidence in the market for single-family homebuilders bounced to its highest level in 35 years.

The coronavirus pandemic has battered the global economy and almost all industries have been deeply impacted. With millions losing jobs over the past few months, finance has been a major problem. This has directly hit the homebuilder market, with few Americans buying homes. However, things started changing gradually once the economy started opening, which saw more people flocking to buy a new home.

Homebuilder Sentiment Highest in 35 Years

Homebuilder confidence in the newly built, single-family home market jumped 6 points to 78 in August on the National Association of Home Builders/Wells Fargo Housing Market Index. The index is now at the highest level in the 35-year history of the monthly series and matches the record it had set in December 1998. Anything above 50 is considered positive sentiment.

The six-point jump in August is a positive sign given that homebuilder sentiment had plummeted to an unprecedented 30 points in April when the coronavirus-led lockdown brought businesses to a standstill. Although homebuilding continued during this period, buyers had pulled back from purchasing new homes.

Of the index’s three components, current sales conditions jumped 6 points to 84. Sales expectations for the next six months increased 3 points to 78, and buyer traffic soared 8 points to 65, marking the highest level in the history of the survey.

Supply Shortage & Other Factors Pushing Demand

Understandably, homebuilders are benefiting from the severe shortage of existing homes for sale. There were already fewer homes to meet demand before the pandemic, and now fewer homeowners are willing to list their homes for sale.

Many other factors are also helping new home sales as states continue to relax stay-at-home restrictions. Sales of new homes rose a sharp 13.8% in June to a seasonally adjusted annual rate of 776,000 units, the highest level since July 2007. New home sales have now recouped the losses suffered when non-essential businesses were shuttered in mid-March to contain the spread of the coronavirus.

Moreover, home-buying activity is getting another boost from record-low mortgage rates which have dropped below 3% for a 30-year-fixed rate mortgage for the first time in nearly 50 years. Unless rates really break much higher, which is unlikely, the latest increase is unlikely to throw cold water on the strong demand for housing. Thus, new home sales are likely to get a boost in the coming days also.

Our Choices

Homebuilder sentiment hitting a record high in August coupled with a rise in new home sales is an indication that buyers are showing interest with the U.S. economy gradually reopening up and people going back to work. In this opportune time to invest in homebuilding, we suggest five stocks with a Zacks Rank #1 (Strong Buy) that are likely to gain ahead. You can see the complete list of today’s Zacks #1 Rank stocks here.

D.R. Horton, Inc. (DHI - Free Report) is one of the leading national homebuilders, primarily engaged in the construction and sale of single-family houses both in the entry-level and move-up markets.

The company’s expected earnings growth rate for the current year is 33.5%. The Zacks Consensus Estimate for current-year earnings has improved 22.2% over the past 60 days. 

Meritage Homes Corporation (MTH - Free Report) primarily engages in building and selling single-family homes for entry-level, first-time, move-up, luxury and active-adult buyers in the historically high-growth regions of the United States.

The company’s expected earnings growth rate for the current year is 42.8%. The Zacks Consensus Estimate for current-year earnings has improved 53.9% over the past 60 days. 

PulteGroup, Inc. (PHM - Free Report) engages in homebuilding and financial services businesses, primarily in the United States. The company conducts operations through two primary business segments – Homebuilding and Financial Services.

The company’s expected earnings growth rate for the current year is 22.1%. The Zacks Consensus Estimate for current-year earnings has improved 44.9% over the past 60 days. 

MI Homes, Inc. (MHO - Free Report) is one of the nation's leading builders of single-family homes. M/I Homes serve a broad segment of the housing market, including first-time, move-up, luxury and empty-nester buyers. 

The company’s expected earnings growth rate for next year is 36.7%. The Zacks Consensus Estimate for current-year earnings has improved 91.2% over the past 60 days.

Beazer Homes USA, Inc. (BZH - Free Report) designs, builds and sells single-family homes. The company designs homes to appeal primarily to entry-level and first move-up home buyers. 

The company’s expected earnings growth rate for next year is 11%. The Zacks Consensus Estimate for current-year earnings has improved 101% over the past 60 days.

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