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4 Homebuilders to Buy Despite Higher Prices & Mortgage Rates

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Homebuilders are currently well placed, belonging to a top-ranked Zacks Industry (top 14%), suggesting that rising home prices and mortgage rates were unable to take the sheen away from the sector in the key spring selling season.

Home Prices

According to the Zillow Real Estate Market Report, median home values rose 8.7% in April from the same month last year, representing their fastest pace of increase in 12 years. Home values in 21 of the 35 largest housing markets have surpassed the peak value hit during the height of the housing boom over a decade ago. San Jose is leading the way higher with a 26% increase in home values, followed by rises of 16% in Las Vegas and 13.6% in Seattle.

The jump could be attributed to the shortage of labor and lack of housing inventory that are pushing up the cost of materials and in turn home prices. Housing inventory declined 6.3% in April from the year-ago month. With this, supply has declined for 35 consecutive months on a year-on-year basis. Despite this, new home sales remained near post-recession highs in April, reflecting builders’ growing confidence in the housing market.  

Mortgage Rates

Mortgage rates are also creeping up with the 30-year fixed mortgage average rate rising to the highest levels since May 2011 to 4.66% (week ending May 24) from 4.61% last week, amid the peak home buying season. According to Freddie Mac, rates have risen in 15 of the first 21 weeks of 2018, marking the highest share of weekly rises since 1972. This is nevertheless much below the 30-year average rate of nearly 8% over the past 45 years, suggesting that the rates are still at historic lows.

With the Fed on track to raise its short-term interest rates over the next two years and unwind some of its prior asset purchases, longer-term interest rates, including that of mortgages, will rise and make homes costlier, hampering affordability. Given this, most borrowers seeking to buy homes would want to lock in the still-low rates, creating solid demand.

Additionally, Americans’ spending has been boosted by recent tax cuts and wage gains. Steady household formations have also added to the strength. Further, millennials who long delayed home ownership are now on a home buying spree. This is especially true as the number of owned homes on the market increased 9.8% in April from the prior month.

How to Play

Given this, investors seeking to tap the homebuilder space could look at the top-ranked stocks that have higher potential to outperform the market and solid characteristics. Below, we have highlighted some of these:

Century Communities Inc. (CCS - Free Report)

Century Communities is a home building and construction company. Its activities comprise land acquisition, development, and entitlements; and the acquisition, development, construction, marketing, and sale of various single-family detached and attached residential home projects. It saw solid earnings estimate revision of 38 cents over the past two months with an expected earnings growth rate of 47.04% -- higher than the industry growth of 38.46%. The stock has a Zacks Rank #1 (Strong Buy) and a Value Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.

Meritage Homes Corporation (MTH - Free Report)

Meritage Homes is the eighth-largest public homebuilder in the United States. The company builds and sells single-family homes for first-time, move-up, luxury and active adult buyers across the West, South and Southeast United States. It saw solid earnings estimate revision of 32 cents for this year over the past 60 days and has an estimated earnings growth of 38.66%. The stock has a Zacks Rank #2 (Buy) and a Value Score of B.

MDC Holdings Inc. (MDC - Free Report)

MDC Holdings is engaged in the homebuilding and financial service businesses in the United States. It is engaged in the construction, sale and related financing of residential housing and the acquisition and development of land for use in the Denver, Phoenix, Maryland, Virginia, mid Atlantic region, Las Vegas, Dallas and California metropolitan areas. The company saw solid earnings estimate revision of 32 cents for this year over the past 60 days and has estimated earnings growth of 27.91%. The stock has a Zacks Rank #1 and a Value Score of A.

Lyon William Homes (WLH - Free Report)

William Lyon Homes is primarily engaged in the design, construction, marketing and sale of single-family detached and attached homes in California, Arizona, Nevada and Colorado. Though it saw negative earnings estimate revision of six cents for this year over the past 60 days, it has an above-average industry earnings growth of 40.72%. The stock has a Zacks Rank #2 and a Value Score of B.

Bottom Line

Higher home prices and rising rates don’t seem to be major issues for the housing market currently and there are a number of reasons to be optimistic going forward. Strengthening economic growth and an accelerating job market point at a much healthier outlook and willingness to buy more homes.

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