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Buy 4 Home Furnishing Stocks on 8-Year High New Home Sales

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The housing market has gathered healthy momentum, thanks to sales of newly built homes that touched its highest level in nearly eight and a half years in June. Sales of previously owned homes, which represent a major part of home buying activities, also touched a record nine-year high last month. Home sales were propelled by solid growth in employment and low mortgage interest rates.

These are signs of sturdy demand in the housing market. Encouragingly, the uptick in new-home construction and building permit numbers has addressed the niggling supply side concerns. Given these promising trends, companies that are involved in producing and selling home improvement products are poised to benefit substantially. Sales at home furnishing and furniture stores had already moved north last month, while home remodeling business gained traction. 

New Home Sales Hit Highest Level Since 2008

According to the Commerce Department, sales of newly built single family homes jumped 3.5% in June to a seasonally adjusted annual rate of 592,000, the highest level since Feb 2008. Even though sales dipped a bit in the Northeast and the South, sales surged 10.4% in the Midwest and 10.9% in the West. May’s sales were also revised upward to a 572,000 annual rate from an earlier estimate of 551,000.

Driven by stellar gains in June, purchases of new-single family homes soared 10.1% during the first six months of the year compared with the same period last year, according to the Commerce Department.  Robert Dietz, chief economist for the National Association of Home Builders (NAHB), said that the “fact that new home sales reached their highest pace in over eight years shows the housing market is gaining momentum.”

While new home sales account for only about 10% of total U.S. home buying activity, sales of previously owned homes account for the rest. Sales of existing homes rose 1.1% in June from May to a seasonally adjusted rate of 5.57 million, its highest level since Feb 2007, according to the National Association of Realtors (read: 4 Stocks to Ride 9-Year High U.S. Home Resales).

What’s Behind this Surge?

Home sales have been gradually improving riding on the back of a strong job market and low mortgage rates. The U.S. economy created a total of 287,000 jobs in June, significantly higher than the consensus estimate of 177,000, according to the Bureau of Labor Statistics. Average hourly earnings also gained 0.1% or 2 cents in June from May to $25.61 per hour.

In June, bond prices also increased as Brexit woes pushed investors to seek safe-haven assets instead of riskier assets like equities. Higher bond prices led to lower yields. This came as good news for home borrowers as mortgage rates also dipped, as they tend to follow the trajectory of the yield on the 10-Year Treasury bond.

The average mortgage is paid off within 10 years, even though most are packaged as 30-year products. Hence, the 10-year bond acts as a yardstick to measure interest rate change. According to Freddie Mac, the 30-year fixed-rate mortgage was 3.57% in June, down from 3.98% in June 2015 (read: How Are Mortgage Rates Determined?).

Housing Starts, Building Permits Impress

Concerns about supply constraints have subsided due to an increase in both housing starts and building permits in June. U.S. housing starts rose 4.8% to a seasonally adjusted rate of 1.189 million in June from the previous month, according to the Commerce Department. Starts on single-family homes and apartments and condominiums all advanced last month.

Building permits, a bellwether for upcoming construction, also rose 1.5% to 1.153 million in June. A rise in the indicator of future housing activities bolstered optimism about the state of the housing industry since a permit is filed before construction begins.

4 Stocks to Furnish Your Portfolio

Affordable home financing and stable jobs market helped home sales to hit record levels in June, which will eventually increase demand for home furnishing products. Remember, supply side issues are also put to rest, thanks to upbeat housing starts and building permit numbers. And homebuilders’ confidence also remains steady.

Meanwhile, home furnishing and furniture stores logged sales of $8.8 billion in June, 0.5% ahead of May’s sales and 2.7% more than the same period last year, according to the U.S. Census Bureau. Additionally, the home remodeling market is picking up pace. Remodeling activity increases demand for home furnishing products.

Hence, it will be prudent to in home furnishing stocks with solid fundamentals. We have selecteinvest d four such stocks that have a Zacks Rank #2 (Buy). Moreover, we have narrowed down our search with a VGM score of ‘A’ or ‘B’. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners.

Tempur Sealy International Inc (TPX - Free Report) develops, manufactures, markets and distributes bedding products. TPX has a VGM score of ‘B’. The company’s estimated growth for the current year is a whopping 21.7%. TPX possesses a price-to-equity (PE) of 15.84, less than the industry average of 16.80.

Williams-Sonoma, Inc. (WSM - Free Report) is a multi-channel specialty retailer of products for the home. WSM has a VGM score of ‘B’. The company’s estimated growth for the current year is a solid 5.8%. WSM possesses a PE of 15.16, less than the industry average of 16.80.

La-Z-Boy Incorporated (LZB - Free Report) manufactures, markets, imports, exports, distributes and retails upholstery furniture products. LZB has a VGM score of ‘A’. The company’s estimated growth for the current year is a sturdy 7.1%. LZB possesses a PE of 17.24, less than the industry average of 25.10.

Virco Mfg. Corporation (VIRC - Free Report) is engaged in the designing, producing and distributing of furniture for a range of customers. VIRC has a VGM score of ‘B’. The company’s estimated growth for the current year is a massive 30%. VIRC possesses a PE of 11.45, less than the industry average of 25.10.

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