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Homebuilding Driving Construction Spending: 4 Stocks to Watch

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Spending on construction projects in the United States rose in November driven by solid gains in single-family homes. However, spending on public construction projects was a bit low.

The homebuilding industry has been helping the construction sector post solid gains ever since the economy reopened as demand for single-family homes has been on the rise following the coronavirus outbreak. Given this situation stocks like Beazer Homes USA, Inc. (BZH - Free Report) ,Toll Brothers (TOL - Free Report) , D.R. Horton (DHI - Free Report) and Lennar Corporation (LEN - Free Report) are expected to benefit in the near term.

Construction Activity Picks Up

The Commerce Department said on Jan 3 that spending on construction projects increased 0.4% in November to a seasonally adjusted annual rate of $1,625.9 billion from October’s revised estimate of $1,618.8 billion. 

On a year-over-year basis, construction spending jumped 9.3% in November. Spending on construction projects has been on the rise almost throughout the year. Construction spending for the first 11 months of the year through November totaled $1,463.2 billion, reflecting a year-over-year increase of 7.9% from $1,355.6 billion in November 2020.

Spending on private projects rose 0.6% in November, while spending on residential construction jumped 0.9%. Spending on single-family homes rose 1.2%. However, spending on public construction projects declined 0.2%.

Homebuilding Market on a High

The homebuilding market has been on rock-solid ground since the economy reopened following the coronavirus-induced lockdown in June 2020. The last year saw demand for single-family homes soar further despite rising labor and raw material costs.

Following the coronavirus outbreak, millions have been looking for new single-family homes in lesser populated areas to avoid contracting the virus. This has been pushing demand. Thus, the homebuilding industry has been playing a major role in driving overall construction spending across the United States for more than a year.

The Commerce Department reported last month that new home sales grew 12.4% in November to a seasonally adjusted annual rate of 744,000 units, after a downwardly revised 662,000 units in October and hitting its highest level since April.

This has seen home builders also gaining confidence despite rising costs. According to the National Association of Home Builders/Wells Fargo Housing Market Index, or HMI, homebuilder confidence in the single-family housing market rose to 84 in December. This is the highest level since February and the fourth straight month of increase.

Our Choices

Homebuilding continues to be a bright spot in the overall construction activity. Private residential construction spending has picked up in order to cater to the escalating demand for new homes, thus making for the right opportunity to invest in homebuilding stocks.

Beazer Homes USA designs, builds and sells single-family homes. The company designs homes to appeal primarily to entry-level and first move-up home buyers. BZH designs homes to appeal primarily to entry-level and first move-up home buyers. Beazer Homes’ objective is to provide customers with homes that incorporate quality and value. BZH’s subsidiary, Beazer Mortgage, originates the mortgages for the company's home buyers.

Beazer Homes’ expected earnings growth rate for the current year is 23.7%. The Zacks Consensus Estimate for current-year earnings has improved 44% over the past 60 days. Shares of BZH have gained 32.8% in the past three months. Beazer Homes has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Lennar is engaged in homebuilding and financial services in the United States. LEN’s reportable segments consist of Homebuilding, Lennar Financial Services, Rialto and Lennar Multifamily. Despite the varied product portfolio, homebuilding remains Lennar’s core business.

Lennar Corporation’s expected earnings growth rate for the current year is 9.3%. The Zacks Consensus Estimate for current-year earnings has improved 4% over the past 60 days. Shares of LEN have gained 23.2% in the past three months. Lennar carries a Zacks Rank #2 (Buy).

Toll Brothers builds single-family detached and attached home communities; master-planned luxury residential resort-style golf communities; and urban low, mid, and high-rise communities, principally on the land it develops and improves. TOL operates in Arizona, California, Florida, Delaware, Maryland, Pennsylvania, and South Carolina. Toll Brothers offers homes under two segments, namely Traditional Home Building Product and City Living.

Toll Brothers’ expected earnings growth rate for the current year is 46.3%. The Zacks Consensus Estimate for current-year earnings improved 10.1% over the past 60 days.  Shares of TOL have gained 29.3% in the past three months. Toll Brothers has a Zacks Rank #1.

D.R. Horton is one of the leading national homebuilders, primarily engaged in the construction and the sale of single-family houses both in the entry-level and move-up markets. DHI’s operations are spread over 91 markets across 29 states in the East, Midwest, Southeast, South Central, Southwest and West regions of the United States. D.R. Horton’shouses are sold under the brand names D.R. Horton - America’s Builder, Emerald Homes, Express Homes and Freedom Homes.

D.R. Horton’s expected earnings growth rate for the current year is 24.9%. The Zacks Consensus Estimate for current-year earnings has improved 9.4% over the past 60 days.  Shares of DHI have gained 28.8% in the past three months. D.R. Horton has a Zacks Rank #3 (Hold).