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Will Rising Mortgage Rates Impact the Housing Market?

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Historically, the construction sector has lagged the S&P 500. The three-year return on the sector is 36.1% compared to 47.3% for the S&P 500. The five-year return is 106.3%, also below the 115.6% for the S&P 500. In the past year however, they’ve jumped 24.0%, trumping the S&P’s 17.95%.

While the sector includes providers of different building products and construction companies, housing construction and related markets are a big piece of it. And this is the segment driving the big changes we’re seeing of late.

Not only is there a big demographic factor with millennials setting up home, but there’s also a renewed drive for bigger homes to accommodate working, schooling, leisure and such things.

While everyone believes that vaccination will take care of things later this year, it seems clear that many of the people/companies/etc. have understood that the operating from home model works well in many situations. So they’ve been making investments in it. So the trend is unlikely to go away entirely.

On top of these factors are the record-low mortgage rates, which have brought not just new home buyers but also move-up buyers into the mix.

As a result, housing demand has skyrocketed, leading to a low-inventory situation and thus driving up prices.

At the same time, renewed confidence in the economy is flushing out money from the 10-year Treasuries, thus depressing prices. So now, you can buy them at a lower price and earn the same coupon rate, which means you’re getting higher yields. When this happens, money pulls out of other higher-risk sectors into Treasuries, unless there’s a corresponding increase in the income from those higher-risk investments. As a result, a rise in Treasury yields automatically leads to higher interest rates and higher mortgage rates, as we’ve been seeing over the past week.

So now, home prices are on the rise, and so are the mortgage rates.  

What Happens Now

Fannie Mae, Freddie Mac and the Mortgage Bankers Association (MBA) have provided the following forecast for 30-year, fixed-rate mortgages –

 

So all agree that we are headed toward higher rates this year.

However, and this is the really important thing, considering that homes are a long-term investment, this rate is now 2.73%, which is the lowest it has been in the past five years. Moreover, even if the rates rise to the highest level forecasted, they would still be attractive enough to keep many in the market. So the housing boom should continue in the next few quarters at least. The only limiting factor/s that I can see at the moment is the availability of land, labor and raw materials.

And that’s probably why the construction sector is the #1 ranked here at Zacks with many of the constituent industries also bearing attractive Zacks ranks.

If you’d like to dive into the space, here are a few stocks worth considering-

Zacks #1 (Strong Buy) ranked Century Communities, Inc. (CCS - Free Report) is a home building and construction company focused on single-family detached and attached residential home projects in major metropolitan markets of Colorado, Texas and Nevada.

With Value and Growth Scores of A, double-digit revenue and earnings growth expected in both 2021 and 2022, and notable estimate revisions in the last 30 days, this is a solid investment.

Particularly so because its valuation is also reasonable at 7.73X forward earnings, which is below its median level over the past year, as well as the S&P 500’s 22.49X.

Zacks #1 ranked KB Home (KBH - Free Report) is another home builder focused on single-family homes, townhomes and condominiums for first-time, move-up and active adult home buyers.

With Value and Growth Scores of A and B, respectively, strong revenue and earnings growth projected in 2021 and 2022 (ending November) and notable estimate revisions, this is another attractive pick.

Its valuation of 7.98X forward earnings is also extremely attractive.

Another stock worth considering in this industry is #2 (Buy) ranked Beazer Homes USA, Inc. (BZH - Free Report) . The company focuses on entry-level and first move-up home buyers looking for value with an eye on quality.

This one has Value and Growth Scores of A and B, respectively. It is also expected to grow in 2021 and 2022 (ending September) although its growth rates aren’t as exceptional as the other two. The estimate revision history is attractive.

 At 7.77X forward earnings, this is another cheap stock.

#2 ranked D.R. Horton, Inc. (DHI - Free Report) focuses on single-family houses both in the entry-level and move-up categories. D.R. Horton’s operations are spread over 90 markets across 29 states in the East, Midwest, Southeast, South Central, Southwest and West regions of the United States

The shares have a Value Score of B and Growth Score of C. Both revenue and earnings are expected to grow strong double-digits in 2021 and 2022 (ending September). The estimate revision trend is extremely attractive.

To top it all, the shares trade at 8.39X forward earnings, which is really cheap all things considered.

The last one on this list is #2 ranked M.D.C. Holdings, Inc. (MDC - Free Report) , which constructs, sells and takes care of related financing of residential housing and the acquisition and development of land in the Denver, Phoenix, Maryland, Virginia, the mid-Atlantic region, Las Vegas, Dallas and California metropolitan areas.

The shares carry a Value Score of B and Growth Score of A. Revenue and earnings are forecasted to increase strongly both this year and the next. The estimate revision history is also very attractive.

Moreover, the shares are valued at 7.73X forward earnings, making them a bargain at this time.

One Month Price Performance

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