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New Home Sales Rebound in August: 5 Lucrative Stocks Picks

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The month of August has come out shining on the back of a surge in new home sales per the reports of the U.S. Census Bureau and the U.S. Department of Housing and Urban Development, reversing the gloomy trend of June and July.

New single-family house sales in August 2018 came in at a seasonally adjusted annual rate of 629,000. This compared with the revised July rate of 608,000, reflecting month-over-month improvement of 3.5%. However, this month-to-month comparison is likely to be unfair to August’s rebound as home sales are drawn from permits and tend to be volatile.

But to our relief, on a year-over-year basis, home sales improved 12.7% in August, as the estimated annual rate in the prior-year month was 558,000. Home buying surged significantly in Northeast and West housing markets. Home sales rose 47.8% and 9.1% respectively in the Northeast and West. However, the same was down 1.7% in South.

Meanwhile, inventory shortage, higher mortgage rates and rising costs for construction companies are the primary headwinds plaguing the homebuilding industry. Subsequently, the median sales price of new houses sold in August was $320,200, up 1.9% year over year while the average sales price was $388,400 up 5.2%.


However, the above mentioned factors shouldn’t deter investors from investing in the space.as there are plenty of positives too.

Where Does the Homebuilding Industry Stand?

So far this year, Homebuilding industry has witnessed a sharp decline of 24.7% against the broader S&P 500 Composite market's 9.2% growth. The underperformance of the industry stems from increased expenses, rising mortgage rates and higher home prices. Further, tariffs on aluminum and steel are denting margins.

Year-To Date Performance (Industry Vs S&P 500)


Further, annual wage growth is below 3% which is offset by increased borrowing costs, making house buying unaffordable for many consumers.

Hike in Interest Rate Adds to Woes

On Sep 27, 2018, the Federal Reserve hiked the interest rate for the third time this year by a quarter-point to a range of 2-2.25%. Since late 2015, the Fed has increased interest rates eight times. The central bank has hinted at another hike for the current year while 2019 is estimated to witness three.

Naturally, in response to this increase in interest rate, mortgage rates are likely to rise further. As it is, the 30-year fixed mortgage rate has increased more than 60 basis points (bps) this year to an average of 4.65%, according to Freddie Mac.

The Silver Lining

Despite all supply side constraints, we believe the housing market stands to rake in gains from an overall flourishing economy, lower unemployment and hike in consumer spending. The National Association of Home Builders/Wells Fargo Housing Market Index (“HMI”) surpassed analysts’ expectations and read 67 points in September. The reading was up three points from the year-ago month but remained flat month-over-month.

Notably, any reading more than 50 points indicates an improving scenario in current housing demand. In the month of September, current sales increased one point to 74; buyer count was steady at 49 while sales prediction over the next six months rose two points to 74.

The index also predicts future sales expectations to remain at 70s, signaling that housing demand will continue to grow this year.

Picking the Right Stocks

August’s new home sales rise clearly indicates a strong demand which when backed by upbeat housing starts data, makes a few stocks in the industry lucrative investment options.

With the help of the Zacks Stock Screener, we have zeroed in on five homebuilding stocks, which carry a Zacks Rank #1 (Strong Buy) or 2 (Buy), and promises earnings and revenue growth for the current year. You can see the complete list of today’s Zacks #1 Rank stocks here.

Armstrong Flooring, Inc. (AFI - Free Report) , a renowned provider of flooring solutions, sports a Zacks Rank #1. The Zacks Consensus Estimate pegs revenues and earnings for 2018 at $1.14 billion and 43 cents respectively. This suggests a revenue growth of 0.5% and a year-over-year earnings growth of 104.8%.

PulteGroup, Inc. (PHM - Free Report) is a U.S. based homebuilding and financial service company. It carries a Zacks Rank #2. For the current year, the Zacks Consensus Estimate forecasts revenues and earnings to grow 17% and 61.2% respectively, from 2017.

D.R. Horton, Inc. (DHI - Free Report) carries a Zacks Rank #2. The company is one of the leading national homebuilders, primarily engaged in the construction and sale of single-family houses both in the entry-level and move-up markets. For 2018, revenues are estimated to increase 15.4% from the prior year. The consensus estimate anticipates current year earnings of $3.87, suggesting year-over-year growth of 41.2%.

Another home building and construction company, Century Communities, Inc. (CCS - Free Report) is also poised to witness revenue and earnings growth in the current year. While the consensus estimate predicts 2018 revenues to grow 54% year over year, earnings are projected to increase 27.2% from the prior year. Century Communities carries a Zacks Rank #2.

Beazer Homes USA, Inc. (BZH - Free Report) , a designer, builder and seller of single-family homes, has a Zacks Rank #2. For 2018, the Zacks Consensus Estimate predicts revenues and earnings to grow 10.1% and 13.6%, respectively, from 2017.

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