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According to a recent report issued by the National Association of Realtors (NAR), pending home sales showed a sharp recovery in June after declining for three straight months. An increase in contract activity was witnessed across all major regions except for the Midwest.

Basically, a sale is listed as pending when the contract has been signed but the deal is yet to close -- this usually happens within a month or two of signing.

The NAR data shows that the Pending Home Sales Index, which is a leading indicator for the housing sector, was 110.2 in June, up 1.5% from May, showing an annual increase for the first time since March.

The NAR said that an increase in the index was observed in June in the Northeast (up 0.7%), the South (up 2.1%) and the West (up 2.9%). The Midwest witnessed a decline of 0.5%.

The biggest issue being faced by the housing market is low supply. Factors like rising lumber costs as well as tight labor supply and shortage of land are impacting inventory build-up. The huge forest fires in Eastern Canada recently could drive lumber prices even higher, creating a potential headwind for the industry.

However, demand remains strong with affordable listings being picked up immediately. Not just this, promising housing starts data was released by the Census Bureau and the U.S. Department of Housing and Urban Development for the month of Jun 2017. Privately-owned housing starts grew 8.3% from May 2017 and 2.1% from the year-ago period while single-family housing starts were up 6.3% compared to May. Building permits also increased (up 7.4% from May and 5.1% from Jun 2016) in Jun 2017.

Picking the Right Stocks

The Home Builders segment enjoys a good Zacks industry rank (Top 11% out of 256 industries). The industry has outperformed the broader market (S&P 500) year-to-date (YTD) as well.

Favorable industry fundamentals, pent-up demand, job gains, income growth, relatively low mortgage interest rates and low inventory of new and existing homes are some of the factors that should support sustained growth in housing demand.

According to the NAR report, existing-home sales should grow 2.6% in 2017 to about 5.56 million with the national median existing-home price expected to increase around 5%.

Here is a look at five housing stocks with a Zacks Rank #1 (Strong Buy) or #2 (Buy).

KB Home (KBH - Free Report) : Los Angeles, CA-based KB Home is among the largest and most recognized homebuilding companies in the U.S. The company sells and builds new homes primarily to first-time, move-up and active adult homebuyers with the focus being on first-time buyers, which represents the largest demand segment. Principal markets include California on the West Coast, Arizona and Nevada in the Southwest, Colorado and Texas in the Central region and Florida and North Carolina in the Southeast.

The company has a strong earnings track record with results surpassing expectations in each of the last four quarters with an average surprise of 12.47%. A solid backlog and a favorable market environment bode well for KB Home which reported better-than-expected second quarter fiscal 2017 earnings along with raising its housing revenue guidance for the year. The company noted that higher deliveries combined with an increasing average selling price are driving strong revenue growth. Meanwhile, increasing activity in the more affordable submarkets of the cities served by KB Home, especially from first-time and first move-up buyers, provides significant opportunity for the company. Estimated earnings growth for fiscal 2017 is 51.7%. YTD, the Zacks Rank #1 stock, has gained 45.9%, outperforming the 31.2% rally of the industry it belongs to.

KBH also has a VGM style score of “B”. The VGM style score is a useful tool that allows investors to gain an insight into a stock’s strengths and weaknesses. While “V” stands for Value, “G” stands for Growth and “M” for Momentum -- the score is a weighted combination of these three metrics. Our research shows that stocks with a VGM Score of “A” or “B” when combined with a Zacks Rank #1 or #2 offer the best upside potential. You can see the complete list of today’s Zacks #1 Rank stocks here.

NVR, Inc. (NVR - Free Report) : Reston, VA-based NVR is one of the nation's largest homebuilding and mortgage banking companies. The company sells and constructs homes under three brand names: Ryan Homes (offers a variety of home-buying options to suit a wide range of consumer needs including single-family, townhouse, or garden condominium), NVHomes (offers additional architectural details and designer elements) and Heartland Homes (luxury homes). NVR’s homebuilding business covers twenty-nine metropolitan areas in fourteen states and Washington, D.C.

NVR, a Zacks Rank #1 stock has a pretty good earnings track record with the company surpassing expectations in three of the last four quarters with an average surprise of 14.19%. Estimated earnings growth for the current year is 33.9%. YTD, NVR stock has shot up 60.3%, significantly outperforming the industry it belongs to.  

Beazer Homes USA, Inc. (BZH - Free Report) : Atlanta, GA-based Beazer Homes is a geographically diversified homebuilder with operations in 13 states within three geographic regions in the country: the West, East and Southeast. The company has a strong earnings track record having surpassed expectations in two of the last four quarters with an average surprise of 103.47%. The company’s shares shot up 10.2% following the release of third quarter fiscal 2017 results. YTD, shares are up 12.8%. Beazer Homes is a Zacks Rank #2 stock with a VGM score of “A”.

Meritage Homes Corporation (MTH - Free Report) : Scottsdale, AZ-based Meritage is the eighth-largest public homebuilder in the country based on 2016 numbers. The company builds and sells single-family homes for entry-level, first-time, move-up, luxury and active adult buyers across the Western, Southern and Southeastern U.S. The company has a strong earnings track record having surpassed expectations in each of the last four quarters with an average surprise of 17.21%. Estimated earnings growth for the current year is 3.8%. Meritage, a Zacks Rank #2 stock, has gained 26.4% YTD.

On its recently held second quarter conference call, Meritage said that it witnessed strong order growth in Texas and Arizona especially at the entry-level segment. The company continues to invest in new communities and secured more than 4,000 new lots in 2Q17 with about 70% for entry level buyers.

Taylor Morrison Home Corporation (TMHC - Free Report) : Scottsdale, AZ-based Taylor Morrison caters to a wide array of consumer groups from coast to coast, including first-time, move-up, luxury, and 55 plus buyers. The company operates under two brands -- Taylor Morrison and Darling Homes. The Zacks Rank #2 stock has surpassed earnings expectations in each of the last four quarters with an average surprise of 11.7%. TMHC has a VGM Score of “A”. Estimated earnings growth for the current year is 12.1%. YTD, the company’s shares are up 20.5%.

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