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August New Home Sales Back on Growth Trajectory: 5 Top Picks

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Sales of new single-family homes in the United States rebounded in August, reversing the declining trend in the prior two months as a result of higher mortgage rates and house prices. Strong sales in the West and Northeast housing markets primarily stoked the numbers last month.

Per the chief economist at the Bank of America, “The housing recovery is entering a new stage.” Lesser existing homes options have shifted homebuyers’ demand toward new builds. The country’s housing starts saw a sharp pickup and touched a three-month high last month, while builders’ confidence gauge was above analysts’ expectation.

Fed’s aggressive stance of raising the cost of borrowing, uptick in house prices and rising costs might have tempered enthusiasm of some potential buyers. Nevertheless, overall economic growth, a dip in joblessness, higher pay packages and expansionary fiscal measures by the Republic-led government will likely turn things in favor of the American housing market

Given this backdrop, investors can bet on selective homebuilding stocks to fetch alluring returns.

New Home Sales Rebound in August

Wednesday’s Commerce Department report revealed that August new home sales logged the best gain in the last six months. Reversing June and July’s drop, aggregate sales of newly constructed homes came in at 629,000, exceeding the prior month’s reading by 3.5%. The upside was primarily driven by robust demand in the Western and Northeastern housing markets. Sales in Northeast climbed 47.8% last month, whereas the same in Western and Midwestern markets jumped 9.1% and 2.7%, respectively.

August new home sales tally also outpaced the year-ago record by 12.7%. So far in 2018, new home sales in the United States have increased 9% year over year.

Can Supply-Side Setbacks Derail New Home Sales Growth?

The housing market is currently plagued with supply-side constraints. Higher mortgage rates and limited construction workforce are concerns for American homebuilders. Some producers are trying to defy these obstacles by raising house prices but this might curb demand in the days ahead. Additionally, Fed’s stand to raise the interest rate for the third time this year has turned the state of affairs more complicated for homebuilders.

However, recovery in August new home sales rekindles hope for an upside in the future.

Robust demand for housing, particularly from Millennials and other newcomers entering the market, is a major reason for the continuing strength in homebuilder confidence. The recent decline in lumber prices from the record levels witnessed in summer is another major positive for the sector. In addition to this, we believe that sturdier economic growth, increased job creation, lower taxes and upbeat wage rates will likely spur new residential construction activity in the months ahead.

The National Association of Home Builders (NAHB) confidence index remained flat in September from the prior month but was above analysts’ expectation. However, the September 2018 reading was up three points to 67 from the year-ago number. Notably, a higher-than-50 reading indicates improving home building market conditions in the United States.

Additionally, August housing starts jumped 9.2% from July’s pace to a seasonally adjusted annual level of 1.282 million units. Single-family housing starts increased a modest 1.9% to 876,000 units while multi-family homebuilding increased 29.3% to a seasonally adjusted annual pace of 406,000 units.

Our Choices

The rebound in August new home sales clearly indicates that an increasing number of people are showing interest in buying homes. Also, stable homebuilders’ confidence index and upbeat housing starts data make the outlook for the industry bullish.

Therefore, picking stocks from the homebuilder industry will be a smart investment option at this point. Below, we have handpicked five top-ranked homebuilding stocks that will likely strengthen your portfolio.

These picks have a Zacks Rank #1 (Strong Buy) or 2 (Buy) and have witnessed positive earnings estimate revisions in the past 60 days. 

Continental Building Products, Inc. (CBPX - Free Report) produces and sells homebuilding products in eastern Canada and the United States. The Zacks Consensus Estimate for earnings has moved up 11.8% to $2.37 per share for 2019. The company’s projected year-over-year earnings growth rate is 52.6% and 16.3% for 2018 and 2019, respectively. The company currently sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Century Communities, Inc.(CCS - Free Report) develops, designs, constructs and sells single-family detached and attached homes in several metropolitan areas of the United States. The company carries a Zacks Rank #2. The Zacks Consensus Estimate for earnings has moved up 2.4% to $4.79 per share for 2019. The company’s projected year-over-year earnings growth rate is 27.2% and 31.1% for 2018 and 2019, respectively.

D.R. Horton, Inc. (DHI - Free Report) is a popular homebuilding company in Midwest, East, South Central, Southeast, and West America. The company holds a Zacks Rank of 2. The Zacks Consensus Estimate for earnings has moved up 3.6% to $4.65 per share for fiscal 2019 (ending September 2019). The company’s projected year-over-year earnings growth rate is 41.2% and 20.1% for fiscal 2018 and 2019, respectively.

PulteGroup, Inc. (PHM - Free Report) primarily provides homebuilding services in the United States. The company holds a Zacks Rank of 2. The Zacks Consensus Estimate for earnings has moved up 2.9% to $3.90 per share for 2019. The company’s projected year-over-year earnings growth rate is currently 61.2% and 10.4% for 2018 and 2019, respectively.

Beazer Homes USA, Inc. (BZH - Free Report) is a premium homebuilder in the United States. The Zacks Consensus Estimate for earnings has moved up nearly 2% to $2.56 per share for fiscal 2019 (September 2019). The company’s projected year-over-year earnings growth rate is 13.6% and 46% for fiscal 2018 and 2019, respectively. The company carries a Zacks Rank #2.

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