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Builders Regain Confidence in September: Top 4 Housing Picks

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Homebuilders have now regained optimism on the U.S. housing market, with homebuilder confidence registering its first monthly gain over the past four months. Defying the unprecedented supply chain disruptions, homebuilder sentiment inched one point higher in September, given solid demand trend and lower lumber prices.

According to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) report released on Monday, monthly reading jumped one point to 76 this month from August. Strong underlying demand for housing raises optimism despite headwinds like rising building material costs and the fact that persistent shortage of skilled labor continues to vex builders. Yet, the NAHB/Wells Fargo HMI is still off its high of 90 reached last November.

For this month, two of the three HMI components grew sequentially. Current sales conditions increased one point to 82. Buyer traffic rose two points to 61 and sales prediction for the next six months remained steady at 81. The HMI gauge of future sales expectation signals persistent growth in housing demand this year.

In the words of NAHB Chairman Chuck Fowke, “The September data show stability as some building material cost challenges ease, particularly for softwood lumber. However, delivery times remain extended and the chronic construction labor shortage is expected to persist as the overall labor market recovers.”

Although a risk of affordability is expected to crop up going forward on accelerating home prices and construction costs, “a still hot but more stable level of activity” in the single-family building market raises hope.

Low Borrowing Costs & Suburban Shift Remain Growth Drivers

Per Freddie Mac’s latest Primary Mortgage Market Survey, the average U.S. 30-year fixed-rate mortgage declined 2 basis points (bps) to 2.86% for the week ended Sep 16 from a week ago. The metric also declined 1 bps from 2.87% recorded in the corresponding prior-year period.

The U.S. housing market remains buoyant, with home sales rising at a record pace, defying low inventory levels. The fundamentals of this rate-sensitive market — which accounts for almost 3% of the economy — remain favorable, given the Fed’s dovish monetary stance and lower mortgage rates.

Furthermore, the willingness for more space to accommodate working and learning from home has been driving the U.S. housing market. Demand for new homes is improving in lower-density markets, including small metro areas, rural markets and large metro exurbs, as people seek larger homes to work from home amid the pandemic.

In the latest release by the organization, it has been highlighted that Exurban markets have seen the most growth, while inner suburbs are now witnessing an increase in demand, especially for townhouses. Regionally, the housing market continues to see growth in the South and the West, particularly the Mountain West.

Key Housing Picks

Adding some housing stocks to your portfolio seems to be a judicious move at this point, given solid demand. With the help of the Zacks Stock Screener, we have zeroed in on four stocks that have a Zacks Rank #1 (Strong Buy) or 2 (Buy) and favorable metrics. A top Zacks Rank indicates that these stocks have been witnessing positive estimate revisions, which generally translate into rapid price appreciation. You can see the complete list of today’s Zacks #1 Rank stocks here.
 

Zacks Investment Research
Image Source: Zacks Investment Research

MI Homes, Inc. (MHO - Free Report) : This Columbus, OH-based builder of single-family homes has been benefiting from solid performance across all 15 of its housing operations, and the Mortgage and Title business. Higher deliveries, greater operating leverage, stellar backlog level, and increased return of equity have been helping the company generate improved profits. The stock carries a Zacks Rank #1 at present and has gained 36% so far this year, outperforming the Zacks Building Products - Home Builders industry’s 18.4% rally. The Zacks Consensus Estimate for its 2021 earnings has been upwardly revised by 32.5% over the past 60 days. Earnings for 2021 are expected to grow 63.3%.

Meritage Homes Corporation (MTH - Free Report) : Based in Scottsdale, AZ, Meritage Homes is one of the leading designers and builders of single-family homes. Its focus on entry-level LiVE.NOW homes has been a major driving factor. Meritage Homes’ strategy of targeting entry-level buyers is expected to boost its performance over the long haul. This Zacks Rank #1 stock has gained 22.8% so far this year. Earnings are expected to grow 72.4% in 2021. Meritage Homes has seen an upward estimate revision of 28.9% for 2021 earnings over the past 60 days.

Century Communities, Inc. (CCS - Free Report) : This Greenwood Village, CO-based company engages in the design, development, construction, marketing, and sale of single-family attached and detached homes. Demand for its affordable new homes driven by favorable demographics, tight resale supply and low-interest rates, while underscoring the strength of its competitive positioning and national footprint across 30 high-growth markets, has been driving Century Communities’ growth. The stock currently carries a Zacks Rank #2 and has gained 43.8% year to date. The company has an expected earnings growth of 115.9% for 2021. The Zacks Consensus Estimate for its 2021 earnings has moved up 16.1% over the past 60 days.

Tri Pointe Homes Inc. (TPH - Free Report) : Based in Irvine, CA, this company engages in the design, construction, and sale of single-family detached and attached homes in the United States. Robust demand and pricing, and better operating leverage have been driving its performance. Cost-cutting initiatives implemented earlier this year and focus on entry-level buyers have been adding to the positives. The stock, carrying a Zacks Rank #2 at present, has gained 25.9% year to date. The Zacks Consensus Estimate for its 2021 earnings has been upwardly revised by 14.2% over the past 60 days. Earnings for 2021 are expected to grow 66.8%.

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