U.S. homebuilders are seeing a rebound in sales, and that is undoubtedly making them hopeful about the housing market. Builders’ confidence in newly-built single family homes improved mostly due to a lower interest rate environment.
Consequently, home building related stocks are well poised to ramp up profits and scale northward.
Home Builder Sentiment Hits a 7-Month High
The housing market went through a torrid time last year. To make things worse, sales of previously-owned homes slumped this month registering the second straight month of a sales decline. The National Association of Realtors claimed that the drop in sales was due to lower supply of homes than required.
And how can we forget that existing home sales, which constitute almost 90% of the housing market, dropped in March for the fourth time in five months, while new home construction decelerated to its slowest pace since May 2017.
Nonetheless, U.S. homebuilder confidence in the newly built, single-family home market did improve this month, easily surpassing estimates. The National Association of Home Builders/Wells Fargo Housing Market Index rose to 66 in May, the highest reading since October. Any reading above 50, by the way, shows that more builders view present conditions as good rather than poor.
In fact, the industry sub-gauge that tracks present sales conditions rose to 72 in May from 69 in the previous month, while the gauge that measures expectations over the next six months picked up from 71 to 72, and the index of buyer traffic rose to 49 from 47.
County-wide, on a three-month moving average basis, sentiment in the South jumped 1 point to 68; in the West, it rose 2 points to 71; in the Northeast it gained 6 points to 57 and in the Midwest up 1 point to 54.
Mortgage Rates Slump for Third Straight Week
NAHB Chairman Greg Ugalde, a home builder and developer in Connecticut, said in a statement that “builders are busy catching up after a wet winter and many characterize sales as solid, driven by improved demand and ongoing low overall supply.” But most importantly, sentiments improved predominantly owing to lower mortgage rates.
NAHB Chief Economist Robert Dietz summed up perfectly by saying that “mortgage rates are hovering just above 4 percent following a challenging fourth quarter of 2018 when they peaked near 5 percent. This lower-interest rate environment, along with ongoing job growth and rising wages, is contributing to a gradual improvement in the housing market.”
Rates of home loans have declined of late. According to Freddie Mac, the 30-year fixed-rate mortgage averaged 4.10% in the May 9 week. But now, it’s down 4 basis points. So far this year, the 30-year fixed has averaged 4.30%, down from 4.54% in 2018.
Similarly, the 15-year fixed-rate mortgage is at present averaging 3.57%, down from an earlier 3.60%. To top it, the 5-year Treasury-indexed hybrid adjustable-rate mortgage is now averaging 3.63%, down 5 basis points.
In the meantime, payrolls jumped a solid 263,000 in April, per the Labor Department, and exceeded all expectations. Unemployment rate fell to 3.6%, a 49-year low, and average hourly earnings growth was unchanged at a healthy 3.2%.
5 Solid Buys
Given the aforesaid positives, investing in housing-related stocks that can make the most of the improved homebuilder sentiment seems judicious. We have, thus, selected five such stocks that carry a Zacks Rank #1 (Strong Buy) or 2 (Buy).
M/I Homes, Inc. (MHO - Free Report) operates as a builder of single-family homes in Ohio, Indiana, Illinois, Minnesota, Maryland, Virginia, North Carolina, Florida, and Texas, the United States. The company currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has risen 2.1% over the past 60 days. The company’s expected earnings growth rate for the current year is 5.7% compared with the Building Products - Home Builders industry’s estimated decline of 10.3%.
NVR, Inc. (NVR - Free Report) operates as a homebuilder in the United States. The company currently has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has increased 12.2% over the past 60 days. The company’s expected earnings growth rate for the current year is 1.8% compared with the Building Products - Home Builders industry’s projected drop of 10.3%.
Taylor Morrison Home Corporation (TMHC - Free Report) operates as a public homebuilder in the United States. The company designs, builds, and sells single-family and multi-family attached and detached homes. The company currently has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has increased 6.9% over the past 60 days. The company’s expected earnings growth rate for the current quarter is 13.5% compared with the Building Products - Home Builders industry’s projected decline of 24.8%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Ethan Allen Interiors Inc. (ETH - Free Report) operates as an interior design company, and manufacturer and retailer of home furnishings in North America. The company currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has climbed 6% over the past 60 days. The company’s expected earnings growth rate for the current year is 17.8% compared with the Retail - Home Furnishings industry’s projected rally of 3%.
PulteGroup, Inc. (PHM - Free Report) primarily engages in the homebuilding business in the United States. The company currently has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has increased 6.6% over the past 60 days. The company, which is part of the Building Products - Home Builders industry, is expected to see earnings growth of 6.8% next year, while it has gained a solid 25.6% over the past five years.
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