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4 Solid Stocks to Buy on Soaring Homebuilder Confidence

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The U.S. homebuilding industry has been suffering for a long time as higher raw material costs and soaring mortgage rates are keeping buyers away from the housing market. Sky-high inflation saw the Federal Reserve aggressively hike interest rates since March 2022, which sent mortgage rates to two-decade highs.

The homebuilding industry started to rebound after the Federal Reserve halted its interest rate hike for the first time in July 2023. It got a further boost at the end of October as the central bank left rates unchanged, which saw mortgage rates moving south once again.

However, the industry once again suffered a setback earlier this month after fresh data showed that inflation rose more than expected in January and was still a lot higher than the Federal Reserve’s 2% target. The consumer price index (CPI) rose 3.1% year over year in January and 0.3% sequentially.

Core CPI, which excludes the volatile energy and food prices, jumped 0.4% sequentially in January and 3.9% from the year-ago levels.

Homebuilder Confidence Soars

The Federal Reserve also indicated earlier that a March rate cut is unlikely as inflation remains elevated. This saw the 30-year fixed-rate mortgage averaging 6.77% as of Feb 15, up 13 basis points from a week earlier.

However, homebuilder confidence still jumped in February on market participants’ anticipation of rate cuts. The Federal Reserve, too, had earlier said that it would go for multiple rate cuts this year. Investors are pricing in at least five quarter percentage point rate cuts in 2024, which is also adding to the homebuilder confidence.

The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) climbed 4 points to reach 48 in February, its highest reading since August and ahead of the consensus estimate of 46. This is also the third straight month of increase in homebuilder confidence.

Moreover, spending on residential construction activity is also steadily rising. Construction spending jumped a solid 0.9% to $2 trillion in December, with investments in residential construction projects climbing 1.4%.

Mortgage rates are expected to decline sharply in the near term once the Federal Reserve starts cutting rates. The first rate cut is now expected in May, which is adding to the homebuilder's confidence.

Our Choices

Given this situation, the housing market is expected to perform well in 2024 as rate cuts are going to help the broader economy. Investing in homebuilding stocks thus appears to be a wise decision. We have narrowed down our search to four homebuilding stocks such as Taylor Morrison Home Corporation (TMHC - Free Report) , NVR, Inc. (NVR - Free Report) , KB Home (KBH - Free Report) and M.D.C. Holdings, Inc. . Each of these stocks carries a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Taylor Morrison Home Corporation is a homebuilder and land developer engaged in building single-family detached and attached homes for first-time buyers, move-up families to luxury and active adult customers. TMHC operates under the Taylor Morrison brand, Monarch brand and Darling Homes brand. Taylor Morrison Home Corporation operates in Arizona, California, Colorado, Florida and Texas.

Taylor Morrison Home Corporation’s expected earnings growth rate for next year is 5.2%. The Zacks Consensus Estimate for current-year earnings has improved 6.3% over the past 60 days. THMC currently 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 the current year is 0.8%. The Zacks Consensus Estimate for current-year earnings has improved 13.6% over the past 60 days. NVR presently sports a Zacks Rank #1.

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, town homes and condominiums.

KB Home’s expected earnings growth rate for next year is 10.4%. The Zacks Consensus Estimate for current-year earnings has improved 5.3% over the past 60 days. KBH presently carries a Zacks Rank #2.

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 the current year is 4.3%. The Zacks Consensus Estimate for current-year earnings has improved 2.1% over the past 60 days. MDC presently has a Zacks Rank #2.

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