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One Year After the Pandemic Hit, Red Hot Construction Has Yet to Stabilize

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At the start of the pandemic, home owners hesitated to put their houses on sale because they were wary of strangers walking all over and possibly spreading infection. But as the inventory crunch pushed up prices, they were encouraged to list their properties.

We have come full circle from that and today, the high prices have home owners wanting to sell, but unable to do it because it has become so difficult to find alternative accommodation. Those that have refinanced their properties at lower rates of interest are also boxed in by the recent spike in the mortgage rate.

This phenomenon would account for the 6.6% month-over-month plunge in February existing home sales despite the median existing-home price for all housing types rising 15.8% from February 2020. Sales were still 9.1% above the year-ago level, pushing inventory 29.5% below. The NAR expects rising prices and higher mortgage rates to affect affordability, further softening sales in the spring buying season.

Combining existing home sales data from the National Association of Realtors and new home sales data from the U.S. Census Bureau and the U.S. Department of Housing and Urban Development (HUD), it appears that new home sales comprise only around 11% of total sales. So while we are all looking for fresh inventory, it’s apparent that new homes play a far lesser role in this than existing homes.

Home construction companies, stretching themselves to build stock may not be able to profit from the rise in prices. The biggest challenges for them are currently land shortage and sky-high lumber prices, none of which will reverse any time soon. Marking up on these costs will of course impact affordability.

However, construction was named as one of the few sectors contributing to the strong jobs data for March. Even if some of this was for the non-residential segment, it’s likely that at least some of the additions were for new home construction as well.

So rather than investing in the builders themselves, it may be a good strategy to invest through materials and component suppliers for an indirect play on the construction sector. Biden’s infrastructure initiative is also a tailwind for these stocks.

Take the Building Products – Wood industry for example. The industry is in the top 6% of Zacks-classified industries, and for good reason. The industry is marked by escalating demand, leading to very strong pricing. Moreover, the inventory crunch is not expected to alleviate this year, meaning that the strong pricing will continue for a while. Zacks #1 (Strong Buy)-ranked UFP Industries, Inc. (UFPI - Free Report) is a good play here.

Another segment worth looking at is the Building Products - Concrete and Aggregates industry (top 7% of Zacks-classified industries). This industry gives you exposure to both the residential and non-residential construction segments, which makes it more attractive at this point. Zacks #1 ranked Forterra, Inc. (FRTA - Free Report) and U S Concrete, Inc. , and #2-ranked Eagle Materials Inc (EXP) and Cornerstone Building Brands, Inc. (CNR) are worth considering here.

The Building Products – Miscellaneous industry is in the top 30% of Zacks-classified industries. This group mainly deals with improvement and renovation products for residential, commercial, infrastructure and other markets. So there are many stocks to pick here. Some stocks that look particularly attractive right now are #1-ranked Owens Corning Inc (OC - Free Report) and Quanex Building Products Corporation (NX - Free Report) , as well as #2-ranked Advanced Drainage Systems, Inc. (WMS), Installed Building Products, Inc. (IBP), James Hardie Industries PLC. (JHX) and Masco Corporation (MAS).

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