The housing market is finally expanding after being in recession for quite a long time. Strong employment, declining mortgage rates and strong monthly confidence index of home builders have given a boost to the home building sector.
Thus, investing in home builders can prove healthy for your portfolio. Let’s have a look.
Housing Market’s Current State
The trade war had freaked out investors and pushed yields on U.S. Treasury bonds to plunge 2% in August, the yields of those bonds influenced mortgage rates. When Treasury bond yield falls it pulls down the interest rates on mortgages with it. As the inverted yield curve in mid-August flashed recessionary warnings, investors pulled out money from equity and invested in safe haven assets and bonds.
As per the Mortgage Bankers Association (MBA) reports, the 30-year fixed mortgage rate fell eight basis points in mid-July to 3.93%, which is the lowest since 2016 and has dropped 80 point in 2019. But, on Aug 15, MBA’s Refinance Index jumped 37%, the highest level in the last three years as existing homeowners race to draw benefits from the falling interest rates. Refinancing also led to the increase in home mortgage application in August.
On the other hand, as per government reports, sales of new homes had plunged 13% in July, making it the biggest monthly decline since July 2013. Several factors contributed to this decline, sales of new homes in the Northeast led the decline by 50%. Notably, the Northeast leads in sales compared to South and West.
The picture is quite different in September though, when stocks of home-building companies are at their best since 2012, banking on a drop in mortgage rate and firming housing date. The unemployment rate is also low and consumers have enough money to spend that further boosts this industry.
On Sep 17, the National Association of Home Builders’ (NAHB) monthly confidence index read a 1 point increase to 68, which is definitely matching with the highest reading in a year. Any reading above 50 signals that confidence among builders is improving. Specifically, the gauge of current single-family home sales has also increased to 75 by 2 points.
Future of Housing Markets
Sales of new homes were on a roller coaster ride since 2018, but are gradually rising with mortgage rates falling to multiyear lows. Falling mortgage rates have boosted sales and seem to be falling even further, thereby promoting sales. This has made home builders optimistic as we can see from the NAHBs’ monthly confidence index reading of 68 in September.
Further, political factors like President Donald Trump’s attack on the central banks to lower interest rate will also impact the mortgage rate. If the country’s benchmark interest rate drops to below zero, it will not benefit the U.S. housing market as such. In fact, lenders especially banks will become stingier with the loans, as it would be costing them higher.
Another factor that will affect the industry is the heightening of the U.S.-China trade war. Tensions increasing between them will harm the economy and flare up recessionary fears. Buyers are banking on a strong labor market and signs of a downturn can reverse the rise.
5 Stocks to Buy
We have thus shortlisted five stocks from the housing sector that flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy).
M.D.C. Holdings, Inc. (MDC - Free Report) is a publicly traded company that engages in homebuilding and financial service businesses in the United States. M.D.C.’s expected earnings growth rate for the current year is 0.2%. The Zacks Consensus Estimate for current-year earnings has improved 7.6% over the past 60 days.
M.D.C. Holdings carries a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
M/I Homes, Inc. (MHO - Free Report) is a publicly traded builder of single family homes. M/I Homes’ expected earnings growth rate for the current year is 5.7%. The Zacks Consensus Estimate for current-year earnings has improved nearly 9% over the past 60 days. M/I Homes carries a Zacks Rank #1.
Taylor Morrison Home Corporation (TMHC - Free Report) is a publicly traded homebuilder and land developer. The company’s expected earnings growth rate for the current year is 4.1%. The Zacks Consensus Estimate for current-year earnings has improved 4.6% over the past 60 days. Taylor Morrison Home Corporation carries a Zacks Rank #1.
NVR, Inc. (NVR - Free Report) is a publicly traded homebuilding and mortgage banking company. NVR’s expected earnings growth rate for the current year is 7.3%. The Zacks Consensus Estimate for current-year earnings has improved 5.4% over the past 60 days. NVR carries a Zacks Rank #2.
D.R. Horton, Inc. (DHI - Free Report) is a publicly traded company engaged in the construction and sale of high-quality homes. D.R. Horton’s expected earnings growth rate for the current year is 7.3%. The Zacks Consensus Estimate for current-year earnings has improved 5.4% over the past 60 days. D.R. Horton carries a Zacks Rank #2.
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