Investment in construction projects in the United States is rebounding at a steady pace as the homebuilding industry continues to recover. This is also a clear sign that slowing inflation is finally helping the economy make a recovery.

Inflation has the biggest and most far-reaching impact on the construction sector as the Fed’s monetary tightening campaign has made borrowing costs and mortgage rates higher and expensive. However, signs of cooling inflation have once again made people confident, leading to a jump in spending on construction projects.

Given this scenario investing in homebuilding stocks like KB Home (KBH Quick QuoteKBH - Free Report) , Beazer Homes USA, Inc. (BZH Quick QuoteBZH - Free Report) , M.D.C. Holdings, Inc. and Meritage Homes Corporation (MTH Quick QuoteMTH - Free Report) would be a wise decision.

Homebuilding Driving Construction Spending

Spending on construction projects increased 0.7% in July to a seasonally adjusted annual rate of $1,972.6 billion compared with June’s revised figure of $1,958.9 billion, the Commerce Department said on Sep 1. On a year-over-year basis, construction spending increased a solid 5.5% in July.

Construction spending has now totaled $1,101.5 billion in the first seven months of the year, up 3.7% from the year-ago period. Spending on construction projects has increased for four straight months, indicating that the economy is making a steady rebound after a difficult 2022.

July’s jump was once again driven by spending on private construction projects, which rose 1% month over month. This was led by a 1.4% rise in residential construction projects.

Spending on single-family construction projects rose 2.8% in July after a 2.1% increase in June. Spending on multifamily housing projects increased 0.2% in July.

Spending on private non-residential structures increased 0.5%, while spending on manufacturing construction climbed a solid 1%.

The homebuilding industry has faced significant challenges as a result of the Federal Reserve's aggressive rate hike strategy aimed at tackling multi-decade high inflation. Since March 2022, the Fed has raised interest rates by 525 basis points on 11 occasions, except for pausing once in June. The federal funds rate now stands in the range of 5.25%-5.5%.

This has significantly elevated mortgage rates. The rate on the 30-year fixed mortgage is more than 7% presently, according to mortgage finance agency Freddie Mac.

However, there remains a severe shortage of single-family homes available for sale. This shortage has contributed to continued investment in construction projects, particularly single-family homes, as demand for housing persists in spite of the high cost of borrowing.

Inflation has declined significantly over the past year and the labor market has finally started showing signs of cooling. This has raised hopes that the Fed might soon end its monetary tightening campaign. This definitely bodes well for the housing market as this will bring down mortgage rates.

Our Choices

Given this scenario, it will be prudent to invest in homebuilding stocks with a favorable Zacks Rank that are poised to gain from the rise in spending on construction projects. We have narrowed down our search to four such stocks. Each of these stocks carries either a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

KB Home is a well-known homebuilder in the United States and one of the largest in the state.  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, townhomes and condominiums.

KB Home’s expected earnings growth rate for next year is 8.9%. The Zacks Consensus Estimate for current-year earnings has improved 5.4% over the past 60 days. KBH currently carries a Zacks Rank #2.

Beazer Homes USA designs, builds and sells single-family homes. 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.

Beazer Homes’ expected earnings growth rate for the next year is 9.7%. The Zacks Consensus Estimate for current-year earnings has improved 20.3% over the past 60 days. BZH presently sports a Zacks Rank #1.

M.D.C. Holdings is engaged in homebuilding and financial services in the United States. MDC’s Homebuilding operations include land acquisition and development, home construction, sales and marketing as well as customer service. The segment delivers single-family detached homes to first-time and move-up buyers under the name Richmond American Homes.

M.D.C. Holdings’ expected earnings growth rate for the next year is 11.9%. The Zacks Consensus Estimate for current-year earnings has improved 38% over the past 60 days. MDC presently carries a Zacks Rank #1.

Meritage Homes is one of the leading designers and builders of single-family homes.  The company primarily engages in building and selling single-family homes for entry-level, first-time, move-up, luxury and active adult buyers in historically high-growth regions of the United States.

Meritage Homes’ expected earnings growth rate for the next year is 5%. The Zacks Consensus Estimate for current-year earnings has improved 25.7% over the past 60 days. MTH presently has a Zacks Rank #1.