The current housing scenario doesn’t seem all that rosy with housing data for the July-August period showing dismal growth. Of late, the industry has been dealing with a shortage in inventory which is raising prices in several parts of the country.
Meanwhile, the devastating Harvey and Irma hurricanes created uncertainties for builders. This, along with higher labor, land and material costs has also been affecting the homebuilding industry.
Meanwhile, National Association of Realtors (NAR) has cut its 2017 forecast for existing-home sales owing to a tepid spring selling season and the impact of hurricanes. The group now expects the sale of 5.44 million homes in 2017, down 0.2% from 5.45 million in 2016 and well below 5.52 million expected earlier.
What Do the Numbers Say?
Existing home sales, which make up a larger part of all the U.S. real estate activity, fell to a one-year low in August (down 1.7%), per the latest report by NAR. This marked the fourth decline in five months, bringing down the annual rate to the lowest level in 12 months. Housing starts dropped 0.8% sequentially in August. In July, existing home sales slipped 1.3% from the previous quarter while housing starts dropped 4.8% sequentially.
It is important to note that on a year-over-year basis, housing starts were 1.4% higher in August. Single-family starts were even stronger, growing 17.1% from a year ago. Meanwhile, building permits, another economic indicator of the health of the housing sector, increased 5.7% sequentially and 8.3% year over year.
Is Declining Data a Matter of Concern?
It is important to note here that the has managed to outperform the broader market (S&P 500) in the third quarter of 2017 despite the recent dampeners. The industry gained 6.2%, compared with the S&P 500 index’s 3.8% increase. Notably, the homebuilding industry ranks among the top 25% of all Zacks industries.
In spite of the lackluster monthly figures, the housing industry seems to be still going strong on a healthy economy, solid job market and affordable mortgage rates.
The U.S. economy grew 3.1% in the second quarter, showing a significant jump from 1.2% growth in the first quarter. Along with strong economic growth, the labor market helped the industry to maintain its stature.
Although the unemployment rate was weak in September in the aftermath of hurricanes Harvey and Irma, economists are expecting the numbers to rebound in the coming months and the economy to continue growing. Average hourly wages rose 2.9% from a year ago. Improving economic growth supported by a better employment picture generally boosts housing activity and provides the basis for stronger demand.
Along with this, solid homebuilder confidence raises optimism for the entire housing industry. Although the index dipped 3 points in September from August, it remained at a confident level of 64 points, according to the National Association of Home Builders and Wells Fargo Housing Market Index report. Notably, the index has remained above 60 since September 2016.
Thus, though the homebuilding industry might face some bottlenecks in the short term, the overall picture is pretty compelling.
Q3 So Far and Expectations for 2017
The Q3 earnings season has already seen releases from 26 S&P 500 members. For the quarter as whole, total Q3 earnings for the S&P 500 index are expected to be up 1.2% from the same period last year on 5.1% higher revenues. With expectations of double-digit earnings growth in each of the first two quarters and high single-digit growth in the concluding quarter of the year, Q3 is anticipated to see the lowest growth.
The Q3 earnings season has so far seen releases from 15.4% of the construction companies in the S&P 500 cohort. According to the latest Earnings Trends, 100% of the companies have surpassed earnings estimates while 50% beat revenue expectations. Total earnings at these construction companies increased 7% on 12.2% higher revenues.
For 2017, total earnings for the broader construction sector are expected to increase 14.2% and revenues are expected to increase 9.1%.
Offsetting the recent adversities, homebuilders like KB Home (KBH - Free Report) and Lennar Corporation (LEN - Free Report) reported stellar third-quarter results. KB Home’s earnings and revenues grew 21.4% and 25.3% year over year, respectively, on strong demand and favorable industry fundamentals.
The company ended the quarter with a double-digit rise in deliveries and housing revenues. Strong orders in value (up 15.3%) and backlog (up 14.5%) bode well for KB Home in 2017. The company also expects the uptrend to continue till 2018.
Lennar surpassed expectations on both the counts for the seventh time in a row. The company’s earnings and revenues rose 5% and 15%, respectively, courtesy of solid demand for homes.
Stocks to Build Your Portfolio
Investors can bank on these housing stocks, which are making the most of the positive housing momentum despite the ongoing adversities. We have chosen companies with the help of Zacks Stock Screener that flaunt a Zacks Rank #1 (Strong Buy) and #2 (Buy) and other important metrics.
Persimmon plc rose 70.8% so far this year, comfortably outperforming its industry’s gain of 41%. The stock has seen a 16.8% rise in the Zacks Consensus Estimate for current-year earnings over the last 90 days. The stock sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
KB Home, a Zacks Rank #2 stock, has gained 73.3% so far this year. Its earnings estimate has improved by 2.4% and 4.4% for 2017 and 2018, respectively, in the last 30 days. The company has solid expected earnings growth of 55.5% for the current year and 23.3% for the next. Also, the stock surpassed earnings estimates by an average 12.7% over the trailing four quarters.
Beazer Homes USA, Inc. (BZH - Free Report) carries a Zacks Rank #2. The stock gained 45.6% year to date. Earnings for the to-be-reported quarter are expected to increase 60.6% year over year. Although, fiscal 2017 earnings are expected to decline, the same is anticipated to increase 67.3% for fiscal 2018. The stock has seen a 5.6% rise in the Zacks Consensus Estimate for fiscal 2018 earnings over the last 30 days.
Beazer Homes expects new home sales and closings to decline year over year due to the devastating hurricanes. That said, the company expects the impact to be only temporary and is confident about substantial productivity gains in fiscal 2018.
Toll Brothers Inc. (TOL - Free Report) gained 37.5% so far this year. Earnings are expected to increase 81.3% for the current quarter and 46% for fiscal 2017. The stock carries a Zacks Rank #2.
The company mostly caters to luxury move up buyers who are looking to shift to larger and better homes. These homebuyers are less sensitive to price changes. Notably, Toll Brothers enjoys greater pricing power than other homebuilding companies.
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