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U.S. Housing Starts & Permits Rise in March: 3 Top Picks

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The month of March saw blistering growth in U.S. housing amid concerns surrounding rising mortgage rates and home prices.

According to Commerce Department data released on Apr 19, housing starts jumped 0.3% month over month to a seasonally adjusted annual rate of 1.793 million units in March, beating the consensus of 1.731 million units by 3.6%. Also, the March figure rose 3.9% on a year-over-year basis. The February figure was also revised upward to 1.788 million units from 1.769 million units reported previously.

Adding to the positives, residential building permits — an indicator of construction activity — leaped 0.4% month over month and 6.7% year over year in March to an annualized rate of 1.873 million units. The March permit level surpassed analysts’ prediction of 1.825 million units by 2.6%. Also, permits for multi-family homes increased 10.9% last month from February and 33.6% year over year.

Yet, single-family homebuilding starts — accounting for the lion’s share of the housing market — pulled back 1.7% in March from February and 4.4% year over year. Starts for the volatile multi-family housing segment soared 7.5% in March and 28.1% from the year-ago period. Permits to build single-family homes also slipped 4.8% from February and 3.9% from March 2021.

Trends to Rule Housing

Although the Fed does not control mortgage rates, any movement in the federal funds rate might have an impact. As expected, the Federal Reserve or Fed hiked its benchmark interest rate for the first time in three years by a quarter point to a range of 0.25-0.5% last month. The rate hike came after the Fed announced the wind-down of its policies enacted during the health crisis and to limit the economic damage from the pandemic.

Now, the Fed’s latest rate hike is certainly not going to work in favor of housing. Consumers’ borrowing costs have already been increasing, thereby hitting the affordability of prospective buyers hard amid economic uncertainty.

It is to be noted that the 30-year fixed-rate mortgage averaged 5% for the week ended Apr 14, 2022. This marked an increase from the last week when it averaged 4.72% and the year-ago period, when it averaged 3.04%.

Also, market pundits, with a more hawkish tone, are of the opinion that the Fed will likely raise the rate by another half-percentage-point at its May 3-4 meeting.

Overall, builders have been facing supply chain disruptions that have pushed prices for building materials higher. Also, a shortage of skilled labor, materials and lots has been making it difficult to increase the pace of construction.

Homebuilder sentiment is also reflective of the fact. According to the recently released National Association of Home Builders/Wells Fargo Housing Market Index, homebuilder sentiment declined 2 points to 77 in April, marking the fourth consecutive month of decline.

Nevertheless, Freddie Mac expects the single-family purchase market to remain solid in 2022 despite increases in mortgage rates, per the latest Quarterly Forecast released on Apr 19, 2022. The company’s chief economist further highlighted that the rising rates might lead to moderation in demand and house price appreciation. Yet, the housing market will remain a bright spot in the U.S. economy.

Sam Khater, Freddie Mac’s chief economist said, “The Federal Reserve’s actions to address inflationary pressure are certainly impacting mortgage rates, which undoubtedly will affect the housing market.” He further added, “While the sharp increase in mortgage rates will lead to a precipitous drop in refinance originations in 2022, demand for housing continues to remain solid, propelled by the large swath of first-time homebuyers and prospective purchasers looking to lock in a mortgage rate before they increase further.”

A few stocks in the housing and home furnishing industries have been benefiting from their respective fundamental strength.

Stocks to Bet On

With that positivity in mind, adding some stocks, which have been cashing in on the positive market dynamics, looks like a smart move at this point.

Yet, picking winning stocks is no mean feat at the moment. With the help of the Zacks Stock Screener, we have zeroed in on three stocks that have a Zacks Rank #1 (Strong Buy) or 2 (Buy) and favorable metrics. You can see the complete list of today’s Zacks #1 Rank stocks here.

Williams-Sonoma Inc. (WSM - Free Report) , a multi-channel specialty retailer of premium quality home products, has been benefiting from strength across all brands along with accelerated e-commerce growth. Williams-Sonoma remains optimistic about business strength, continued success of new initiatives and competitive advantages that are rooted in key differentiators like in-house design, digital-first channel strategy, and values.

Earnings estimates for Williams-Sonoma — which currently carries a Zacks Rank #1 — for the current fiscal year have increased to $15.75 per share from $15.56 over the past 30 days. WSM’s earnings are expected to rise 6.1% year over year in fiscal 2022.

LL Flooring Holdings, Inc. (LL - Free Report) — a specialty retailer of hard-surface flooring — has been accelerating store openings, enhancing customer experience and innovating products to drive growth.

LL currently carries a Zacks Rank #1. Earnings estimates for the current fiscal year have increased to $1.18 per share from $1.00 over the past 30 days.

The Lovesac Company (LOVE - Free Report) — which designs, manufactures, and sells furniture — has been gaining from operational flexibility, highly-engaged customers, innovation and a proven omni-channel approach.

LOVE currently carries a Zacks Rank #1. Earnings estimates for the current fiscal year have increased to $3.16 per share from $1.91 over the past 30 days. LOVE’s earnings are expected to rise 71.7% year over year this year.

Lennar Corporation (LEN) — a Miami, FL-based homebuilder — continues to gain from effective cost control and focus on making its homebuilding platform more efficient, which in turn is resulting in higher operating leverage.

Lennar currently carries a Zacks Rank #2. Earnings estimates for the current fiscal year have increased to $16.43 per share from $16.02 over the past 30 days. Lennar’s earnings are expected to rise 15.1% year over year in fiscal 2022.

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