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Solid August Data & Fed's Rate Cut Light Up Housing: 5 Picks

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The month of August saw blistering growth in U.S. housing since mid-2007. The rebound in the sector was much anticipated, thanks to lower mortgage rates.

According to Commerce Department data released on Sep 18, housing starts jumped 12.3% month over month — the highest level since June 2007 — to a seasonally adjusted annual rate of 1.364 million units in August, beating the consensus of 1.249 million units by 9.2%. Also, the August figure rose 6.6% on a year-over-year basis. Notably, the July figure was also revised up to 1.215 million units versus 1.191 million units reported previously.

Single-family homebuilding, accounting for the lion’s share of the housing market, rose 4.4% from July in August, the best since January. Starts for the volatile multi-family housing segment soared 32.8% in August, reversing the prior two months’ declines.

Moreover, residential building permits, an indicator of construction activity, leaped 7.7% month over month in August to an annualized rate of 1.419 million units — the highest since May 2007. The August permit level surpassed analysts’ prediction of 1.280 million units by 10.9%. Permits to build single-family homes jumped 4.5% and that for multi-family homes increased 13.3% last month.


Trends to Rule Housing

Although the Fed does not control mortgage rates, any movement in federal funds rate might have an impact. As expected, the Federal Reserve or Fed lowered its benchmark interest rate for the second time since July by a quarter point to a range of 1.75% to 2% in its two-day policy meeting under the chief Jerome Powell, on Sep 18. Slowing global economy and tensions from the trade war between the U.S. and China likely spurred the Fed to cut rates.

Now, the Fed’s latest 25-bp rate cut is certainly going to work in favor of housing. Consumers’ borrowing costs have already been declining since the Fed cut interest rates in July, fueling a trend of mortgage refinancing and thereby lending support to household spending despite economic uncertainty.

In the recent Primary Mortgage Market Survey report published by Freddie Mac, the 30-year, fixed-rate mortgage average declined to 3.56% from the previous year’s 4.60% and from 3.75% in the week before the Fed’s Jul 30-31 policy meeting. Also, mortgage purchase applications for the month of August increased 33% on a year-over-year basis, per the Mortgage Bankers Association (MBA) Builder Application Survey.

Low mortgage rates and a solid labor market are helping the residential construction, which hasn’t contributed to economic growth since the end of 2017.

In fact, the homebuilding industry has been on the rise since January, buoyed by above-mentioned tailwinds. The Zacks Building Products - Home Builders industry has risen 41.6% so far this year, comparing favorably with the S&P 500’s rally of just 18.5%.


Will Supply Dearth & Trade War Stall Housing Momentum?

Despite historically-low mortgage rates and rising wages, the housing market has been strained by a low inventory of affordable homes, thanks to rising construction costs and shortage of land or lots. In fact, lack of supply has been the biggest hurdle in the path of housing market recovery.

Meanwhile, builders also noted that the year-long U.S.-China trade war, which has slowed the manufacturing sector, is impeding home construction in some parts of the country. The trade spat has certainly caused uncertainty for builders as well as for price-conscious buyers, regarding both domestic and global economic growth.

Nonetheless, with both starts and permits coming in at levels not perceived in more than 12 years, the optimism surrounding the housing market has been reinstated. Then again, it remains to be seen whether the August result is an anomaly, given the trade war challenges and high land, labor and materials costs.

Stocks to Bet On

Adding some homebuilding stocks, which have been cashing in on the positive market dynamics, looks like a smart move at this point. Notably, the homebuilding industry is in the top 9% of the Zacks Industry Rank.

However, picking winning stocks is no mean feat. With the help of the Zacks Stock Screener, we have zeroed in on five stocks that have a Zacks Rank #1 (Strong Buy) or 2 (Buy) and favorable metrics. You can see the complete list of today’s Zacks #1 Rank stocks here.

M.D.C. Holdings, Inc. (MDC - Free Report) , a Zacks Rank #1 stock, mainly engages in the construction and sale of single-family detached homes to first-time and first-time move-up homebuyers. Earnings estimates for the current and next year have moved up 6.1% and 17.3%, respectively, over the past 60 days. Although the bottom line has been subdued for 2019, it is expected to grow 14.3% in 2020.

M/I Homes, Inc. (MHO - Free Report) , sporting a Zacks Rank #1, operates as a builder of single-family homes in Ohio, Indiana, Illinois, Minnesota, Maryland, Virginia, North Carolina, Florida and Texas. The company has expected earnings growth of 15.1% for the current year. Estimates for earnings have moved 9% north over the past 60 days for the current year.

Meritage Homes Corporation (MTH - Free Report) , also a Zacks Rank #1 stock, mainly focuses on building homes for entry-level, first-time and move-up buyers. Earnings have surpassed the Zacks Consensus Estimate in 14 of the trailing 15 quarters. Earnings estimates have moved 13.4% higher for 2019 and 14.7% for 2020 over the past 60 days.

Taylor Morrison Home Corporation (TMHC - Free Report) , a homebuilder and land developer engaged in building single-family detached and attached homes for first-time buyers, move-up families to luxury and active adult customers. It currently carries a Zacks Rank #1. Earnings estimates have moved 4.5% higher for 2019 and 4.4% for 2020 over the past 60 days.

D.R. Horton, Inc. (DHI - Free Report) is engaged in the construction and sale of high-quality homes through a diverse brand portfolio. Earnings estimates for this Zacks Rank #2 company have moved 6.9% north for the current year and 5.5% for the next over the past 60 days. It has a three-five year expected EPS growth rate of 11%.

5 Stocks Set to Double

Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.

Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.

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