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Construction Spending Continues to Rise: 4 Stocks to Buy

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Spending on construction projects has seen a steady rise over the past few months. Although rising costs led to sluggish construction spending in March, it has been a good year, with spending on construction projects rising in the first quarter.

The homebuilding sector, which has been primarily driving spending on construction projects, has continued to play a key role this year, too, although higher mortgage rates and rising raw material and labor costs have been a cause of concern. Against this backdrop, stocks like NVR, Inc (NVR - Free Report) , Beazer Homes USA, Inc. (BZH - Free Report) , M/I Homes, Inc. (MHO - Free Report) and Tri Pointe Homes, Inc. (TPH - Free Report) are likely to benefit.

Construction Spending Rises

The Census Bureau announced on May 2 that construction spending increased 0.1% in March to a seasonally adjusted annual rate of $1,730.50 billion. February’s figures were revised to $1,728.6 billion. Although spending on construction projects in March was below estimates of 0.7%, the good sign is that it is still on the rise despite worries of rising inflation.

On a year-over-year basis, construction spending rose 11.7% from the March 2021 figure of $1,548.6 billion.

In the first quarter, spending on construction projects jumped 12% to $376.6 billion from $336.6 billion a year ago.

According to the report, spending on private construction projects rose 0.2% in March to a seasonally adjusted annual rate of $1,379.7 billion from February’s estimated figure of $1,376.9 billion. This included a 1% rise in construction spending on homebuilding projects to $882 billion compared to February’s figures of $873.2 billion.

However, spending on non-residential private construction projects declined 1.2% to $497.6 billion from February’s revised figures of $503.6 billion.

Construction Sector Fighting Challenges

The construction sector has been on solid ground but has lately been suffering from rising costs. Although spending on private construction projects has been on the rise, public construction spending has slowed down. 

In March, things took a turn for the worse, with spending on public construction declining 0.2% to $350.8 billion on a month-over-month basis. This was primarily due to a 0.8% decline in spending on education construction and a 0.4% decline in highway construction projects.

The homebuilding market has lately been suffering, with both existing and new home sales declining in March. Rising labor and raw material costs and higher interest rates have made people skeptical about buying new homes. Also, homebuilders’ confidence has taken a beating because of this.

Even then, the homebuilding sector has been the mainstay of construction spending for quite some time. Despite major challenges, the homebuilding sector once again played a key role in driving the overall construction spending in March.

Despite steeper prices, demand for single-family homes has only increased over the past couple of years. This saw the sector emerge as a winner even during the peak of the pandemic.

Moreover, homebuilders had already anticipated that interest rates would rise and more people would be buy homes in the near future, as further rate hikes would curtail the pace of purchases.

Our Choices

Homebuilding remains a bright spot in terms of overall construction activity. Private residential construction spending increased to meet the rising demand for new houses, creating an ideal investment opportunity for homebuilding companies.

NVR, Inc. is engaged in the construction and sale of single-family detached homes, townhomes and condominium buildings, all of which are primarily constructed on a pre-sold basis. In order to serve homebuilding customers, NVR operates a mortgage banking and title services business. NVR operates in two business segments:  Homebuilding and Mortgage Banking.

NVR’s expected earnings growth rate for the current year is 68.4%. The Zacks Consensus Estimate for current-year earnings has improved 20.4% over the past 60 days. NVR has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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

Beazer Homes USA’s expected earnings growth rate for the current year is 29.9%. Shares of BZH have gained 14.4% in the past three months. Beazer Homes USA sports a Zacks Rank #1.

M/I Homes, Inc is one of the nation's leading builders of single-family homes. MHO has established an exemplary reputation based on a strong commitment to superior customer service, innovative design, quality construction and premium locations. M/I Homes serve a broad segment of the housing market, including first-time, move-up, luxury and empty nester buyers. MHO designs, markets, constructs and sells single-family homes and attached townhomes to first-time, move-up, empty-nester and luxury buyers.

M/I Homes’ expected earnings growth rate for the current year is 21.3%. The Zacks Consensus Estimate for current-year earnings has improved 5.6% over the past 60 days. MHO carries a Zacks Rank #2 (Buy).

Tri Pointe Homes, Inc. is involved in the design, construction and sale of single-family homes. TPH’s operating portfolio includes Maracay Homes in Arizona; Pardee Homes in California and Nevada; Quadrant Homes in Washington; Trendmaker Homes in Texas; TRI Pointe Homes in California and Colorado; and Winchester Homes in Maryland and Virginia.

Tri Pointe Homes’ expected earnings growth rate for the current year is 29.6%. The Zacks Consensus Estimate for current-year earnings has improved 7% over the past 60 days. TPH sports a Zacks Rank #1.