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Homebuilder Confidence Hits 7 Month-High in May: 4 Top Picks

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Homebuilders’ confidence in May climbed to its highest level in seven months, according to the report released by the National Association of Home Builders (NAHB) on Wednesday.

According to the report, Housing Market Index (HMI) reading climbed to 66 in May from 63 in April, sustaining this year’s upward momentum, on declining mortgage rates, moderating home prices and higher home sales. Although the May reading is lower than the year-ago level of 70, it is the highest reading since October. Notably, any reading of more than 50 signals improving conditions.

Encouragingly, three HMI components grew in May. A gauge of present sales conditions increased three points to 72 from April. Buyer traffic rose two points to 49 while sales prediction for the next six months inched up by one point to 72.

Regionally, on a three-month moving average, sentiment in the Northeast jumped six points to 57; in the West, it rose two points to 71; in the Midwest it was up one point to 54 and in the South, it increased one point to 68.

NAHB Chairman, Greg Ugalde noted, “Builders are busy catching up after a wet winter and many characterize sales as solid, driven by improved demand and ongoing low overall supply.” However, he added that affordability challenges remain an impediment to home sales.



Declining Mortgage Rates & Strong Demand Raise Hope

Mortgage rates have moderated after a month-long climb, according to Freddie Mac’s latest Primary Mortgage Market Survey. The 30-year fixed mortgage averaged 4.1% for the week ending May 9, down from 4.14% the previous week and 4.55% a year ago.

Market pundits remain optimistic and believe that low mortgage rates, accompanied with a strong job market and modest wage growth should spur buyers’ interest this spring.

Notably, sales of new homes in the United States jumped to a 16-month high in March, marking the third straight monthly increase. Sales of newly constructed single-family homes, accounting for roughly 10% of all U.S. home sales, grew 4.5% from February to a seasonally adjusted annual rate of 692,000 units last month — the highest level since November 2017.

At the same time, existing home sales, which make up about 90% of the market, dropped in March for the fourth time in five months, while new-home construction declined to the slowest pace since May 2017.

Indeed, lower rates and higher incomes have lifted housing activity in the recent times. However, ongoing land and labor shortages and rising material costs are pressing concerns. On top of it, the trade war with China is gradually heating up, thus limiting the possibility of negotiations. This has increased challenges for the industry players. On May 9, the Trump administration raised tariffs from the existing 10% to 25% on $200 billion in Chinese-made products.

That said, the easing of housing market pressure in recent times along with a strong economy should lead to strong demand going forward.

4 Top-Ranked Homebuilding Stocks to Bet On

We have zeroed in on four homebuilding stocks with solid potential. These are worth investing in despite the abovementioned woes.

NVR, Inc. (NVR - Free Report) : This Reston, VA-based homebuilder currently sports a Zacks Rank #1 (Strong Buy). Earnings estimates for the current year have increased 12.2% over the past 30 days. The company has a three-five year expected EPS growth rate of 10.7% and a solid earnings surprise history. It beat earnings estimates in each of the trailing four quarters, the average positive surprise being 17.6%. You can see the complete list of today’s Zacks #1 Rank stocks here.

PulteGroup, Inc. (PHM - Free Report) : This Atlanta, GA-based homebuilder also sports a Zacks Rank #1. Earnings estimates for the current year have moved 6.6% north over the past 30 days. It surpassed earnings estimates in each of the trailing four quarters, the average positive surprise being 13.5%.

Taylor Morrison Home Corporation (TMHC - Free Report) : Headquartered in Scottsdale, AZ, this homebuilder currently carries a Zacks Rank #1. Earnings estimates for the current year have moved 6.9% north over the past 30 days. It also topped the consensus mark in each of the trailing four quarters, the average positive surprise being 38.7%.

M/I Homes, Inc. (MHO - Free Report) : This Columbus, OH based homebuilder currently carries a Zacks Rank #2 (Buy). Earnings estimates for the current year have increased 2.1% over the past 30 days. It surpassed analysts’ expectations in each of the trailing four quarters, the average positive surprise being 8.4%.

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