Since the economy started reopening following the onset of the pandemic, demand for homes in the United States has helped the homebuilding market. While construction activity is yet to attain the optimum level, the homebuilding sector has played an active role in overall construction spending.

After a successful 2020 and 2021, the homebuilding market seems to be on track for further growth this year, with home sales rising in January. Given this situation, stocks like D.R. Horton (DHI Quick QuoteDHI - Free Report) ,Toll Brothers (TOL Quick QuoteTOL - Free Report) , KB Home (KBH Quick QuoteKBH - Free Report) and Lennar Corporation (LEN Quick QuoteLEN - Free Report) are likely to benefit in the near term.

Existing Home Sales Soar

The National Association of Realtors (NAR) said on Feb 18 that existing home sales jumped 6.7% in January to a seasonally adjusted annual rate of 6.5 million units. Economists had forecast a decline of 1% in existing home sales to a rate of 6.1 million units. The NAR also said that sales increased 9.3% in the densely populated South.

Existing home sales account for the bulk of the home sales in the United States. However, sales declined 2.3% on a year-over-year basis as median prices of homes increased 15.4% from last year at this time to $350,300.

People have been scrambling to buy homes, while homebuilders are struggling to ramp up construction owing to higher labor costs, rising prices of raw materials like softened lumber and shortage of supply.

However, January’s sales growth came despite rising costs. People rushed to buy homes across the United States in anticipation of prices rising further once the Fed goes for rate hikes. This will further push up the prices of homes, which many buyers are trying to avoid.

Homebuilding Market Overcoming Challenges

The homebuilding market seems to be on track for a rally after slowing down during the last few months of 2021. Demand for homes is expected to be strong this year, driven by the ongoing demographic shift, as millennials and Gen-Zers are trying to come of age and become homeowners now.

However, the supply of homes is far lower than what it was before the pandemic hit, making it difficult to find new homes. Increasing costs of raw materials and rising rates may also be a cause of concern in the coming months.

This may not be all true. According to a separate report released last month by the Conference Board, home-buying intentions for the next six months have reached a new high, which is a positive indication for the industry.

There were fewer homes available before the pandemic because of high demand, and fewer homeowners are willing to put their homes on the market now. This has led to higher home prices, which is projected to continue in the coming days.

Our Choices

The homebuilding market is going strong, despite rising prices, and demand for homes is predicted to remain high through 2022. As a result, this is an opportune time to invest in homebuilding stocks.

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’s houses 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 38.5%. The Zacks Consensus Estimate for current-year earnings has improved 9.4% over the past 60 days.  DHI has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Lennar Corporation 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 10.9%. The Zacks Consensus Estimate for current-year earnings has improved 3.9% over the past 60 days. LEN carries a Zacks Rank #2 (Buy).

Toll Brothers Inc. 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 49.9%. The Zacks Consensus Estimate for current-year earnings improved 2.5% over the past 60 days.  TOL has a Zacks Rank #2.

KB Home is a well-known homebuilder in the United States and one of the largest in the state. KB Homes’ revenues are generated from Homebuilding (accounting for 99.7% of fiscal 2021 total revenues) and Financial Services (0.3%) operations. KBH’s homebuilding operations include building and designing homes that cater to first-time, move-up and active adult homebuyers on acquired or developed lands. KB Home also builds attached and detached single-family homes, town homes and condominiums.

KB Home’s expected earnings growth rate for the current year is 67.9%. The Zacks Consensus Estimate for current-year earnings has improved 28.9% over the past 60 days. KBH sports a Zacks Rank #1.