The U.S. homebuilding industry has made a steady recovery from the economic slump in 2008, buoyed by healthy demand-supply balance, historically low mortgage rates, steady job and wage growth, and easy availability of loans, to name a few. The overall fundamentals of the housing market have been encouraging through 2016 and are expected to improve throughout 2017.
However, shortage of buildable lots, skilled labor and capital are limiting home production, thereby lowering the inventory of homes, both new and existing. Reduced inventory means fewer options for buyers, which in turn affects the overall affordability of homes. Per the National Association of Realtors or NAR, total housing inventory at the end of July declined 1% to 1.9 million homes available for sale. It is also 9% lower than the year-ago figure, falling straight for the 26th consecutive months.
But again, strong demand coupled with low inventory levels is driving home prices thereby boosting revenues for homebuilders. The median existing-home price for all housing types in July rose 6.2% from the year-ago level, marking the 65th straight month of year-over-year gains. We believe prices will continue to scale higher as demand for homes is like to grow on high consumer confidence and low unemployment.
Good Times Ahead for the Industry?
The Zacks Homebuilding Industry has outperformed the broader market (S&P 500) so far this year. Currently, the industry ranks among the top 18% (47 out of 265 industries). Along with the strong past performance of the industry, a solid industry rank signals that companies in the homebuilding space are likely to benefit from favorable factors in the immediate future. There are plenty of factors that are working in favor of the industry which will enhance its prospects in 2017 and beyond.
The U.S. economy grew faster-than-anticipated in the second quarter (fastest pace in more than two years) and shows a significant jump from the first quarter’s lackluster 1.2% growth. The economy grew at an annual rate of 3% in second quarter, according to the second estimate released by the Commerce Department on Aug 30. Steady economic growth along with favorable demographics and historically low interest rates are expected to bolster housing demand further.
Although the recent bump up in interest rates has raised concerns over the outlook of home prices in 2017, the rates should remain reasonable, keeping housing affordable. Modest hikes in interest rates in the context of an improving economic environment can be a positive for the housing sector.
For 2017, existing home sales are projected to increase 3.5% from 2016 levels, while new single-family home sales will rise 10.9% nationally, as per the National Association of Realtors’ June 2017 forecast.
Amid such a backdrop, it will be prudent to invest in homebuilding stocks with compelling prospects. Growth investors look for stocks with aggressive earnings or revenue growth potential. Studies have shown that stocks exhibiting the best growth characteristics consistently outperform the market. When combined with a top Zacks Rank, the returns are even better.
To beat market returns as well as to gain from the above-mentioned factors, we have used the Style Score System to narrow down on stocks with solid prospects, sporting a Zacks Rank #1 (Strong Buy) or 2 (Buy) and a Growth Style Score of A or B.
Here we zero in on a few homebuilding stocks that are poised for healthy growth.
M/I Homes, Inc. (MHO - Free Report) , one of the leading builders of single-family homes, sports a Zacks Rank #1 and a Growth Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.
M/I Homes’s 2017 earnings are likely to grow 37.1%, higher than the industry’s projected EPS growth of 17.9%. Sales for 2017 are projected to grow 14.1%, higher than the industry’s estimated growth of 8%.
Also, M/I Homes is witnessing upward estimate revisions — up 0.6% for 2017 and 2.4% for 2018 — over the last 60 days.
NVR, Inc. (NVR - Free Report) sports a Zacks Rank #1 and a Growth Score of A. It delivered average positive earnings surprise of 14.2% over the trailing four quarters. The company also has long-term expected EPS growth rate of 14.9%.
NVR’s 2017 earnings are likely to grow 33.9%, higher than the industry’s projected EPS growth of 17.9%. Sales in 2017 are projected to grow 10%, more than the industry’s estimated growth rate of 8%.
Also, NVR has been seeing upward estimate revisions — up 7.3% for 2017 and 4.2% for 2018 — over the last 60 days.
Persimmon plc (PSMMY - Free Report) has a Zacks Rank #2 (Buy) and a Growth Score of B. The company’s 2017 earnings are likely to grow 18.3%, higher than the industry’s projected EPS growth of 17.9%.
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