Spending on construction projects in the United States increased in August, hinting at a slow but steady recovery to normal. Inflation has been showing signs of easing, which has seen investment in construction projects picking up lately.

The Commerce Department said on Oct 2 that spending on construction projects was primarily driven by investment in the housing sector. Given this scenario, investing in homebuilding stocks like Toll Brothers Inc. (TOL Quick QuoteTOL - Free Report) , M.D.C. Holdings, Inc. , NVR, Inc. (NVR Quick QuoteNVR - Free Report) and PulteGroup (PHM Quick QuotePHM - Free Report) would be a wise decision.

Construction Spending Expands

The Commerce Department reported that spending on construction projects increased 0.5% to a seasonally adjusted annual rate of $1,983.5 billion in August after rising 0.9% in July and coming in line with economists’ expectations. Year over year, construction spending jumped a solid 7.4% in August.

Spending on private construction projects rose 0.5%, with investment in private residential projects advancing 0.6% after rising 1.6% in July. Overall spending on private construction projects rose 1.2% in July.

Construction spending totaled $1,284.7 billion in the first eight months of this year compared to $1,233.4 billion for the same period in 2022.

Construction spending on private non-residential structures such as factories increased 0.3% in August, while manufacturing construction projects jumped 1.2%.

A shortage of homes available for sale is fueling investment in private residential projects, although mortgage rates remain sky-high. The 30-year fixed mortgage rate averaged 7.31% last week, the highest level since December 2000.

However, this appears to be the new normal. Spending on multi-family residential projects jumped 0.6% in August, while spending on single-family home projects increased 1.7%.

The homebuilding sector had been the mainstay of construction spending during the peak of the pandemic and months following that as more people opted for single-family homes.

However, inflation has had the biggest and most far-reaching impact on private housing projects as the Fed’s monetary tightening campaign has been taking its toll on the housing sector owing to higher mortgage rates.

The current housing market is still grappling with a significant shortage of single-family homes available for sale. Despite the high cost of borrowing, this scarcity has led to sustained investments in construction projects, especially in single-family homes. Demand for housing remains robust, encouraging investments in new housing developments.

Moreover, inflation has seen a notable decline over the past year, and there are signs of a slowdown in the labor market. These developments have sparked optimism and the Federal Reserve has also said that it will go for another quarter percentage point interest rate hike in November before starting to cut rates in 2024. Such a move would likely lead to a reduction in mortgage rates, which is seen as a positive development for the housing market. Lower mortgage rates can make homeownership more affordable and potentially stimulate further demand in the real estate sector.

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.

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 1.4%. The Zacks Consensus Estimate for current-year earnings improved 12.3% over the past 60 days. TOL presently sports a Zacks Rank #1.

M.D.C. Holdings, Inc. 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 next year is 14.2%. The Zacks Consensus Estimate for current-year earnings has improved 26.6% over the past 60 days. MDC presently sports a Zacks Rank #1.

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. To serve homebuilding customers, NVR operates a mortgage banking and title services business.

NVR’sexpected earnings growth rate for next year is 0.4%. The Zacks Consensus Estimate for current-year earnings has improved 2.1% over the past 60 days. NVR presently carries a Zacks Rank #2.

PulteGroup engages in homebuilding and financial services businesses, primarily in the United States. PHM conducts operations through two primary business segments — Homebuilding (which accounted for 97.2% as of 2021 total revenues) and Financial Services (2.8%). PulteGroup’s Homebuilding segment offers a wide variety of home designs, including single-family detached, townhouses, condominiums and duplexes at different prices, with a variety of options and amenities to all major customer segments: first-time, move-up and active adult.

PulteGroup’s expected earnings growth rate for next year is 0.8%. The Zacks Consensus Estimate for current-year earnings has improved 4.1% over the past 60 days. PHM has a Zacks Rank #2.