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2020 Could be a Great Year for Housing: 5 Stocks to Buy Now

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The year 2019 has turned out to be an encouraging one for Zacks Building Products - Home Builders industry so far. This is evident from the industry’s cumulative growth of 46.6% year to date, compared with the S&P’s rally of 26%. Notably, the industry is likely to enter 2020 with the same vigor. The upside can be attributed to low rates, rising building permits and solid construction starts.

Housing Industry Holds Promise in 2020: Key catalysts

Mortgage Rates Continue to Attract Home Buyers

Lower mortgage rate, owing to the Federal Reserve’s consecutive three rate cuts, has been one of the major reasons behind the housing market rally. The U.S. central banks’ last rate cut in October lowered the lending rate between 1.50% and 1.75%. Meanwhile, weekly average of the 30-year fixed mortgage rates as of Dec 19, 2019 was 3.73%, which is below the November 2018 peak of 4.9% according to data from Freddie Mac, a mortgage finance agency. This cheap borrowing cost has fueled demand for new homes. Market experts believe that mortgage rates will remain low in 2020, which will continue to stimulate demand, keeping sales volume positive in 2020.

Economic Growth on Track

The U.S. economy is currently witnessing a Goldilocks scenario and is operating in an optimal state by providing full employment and stability. The state of the economy is neither too dull to cause recession nor too bright to result in inflation. In this scenario, one can expect the industry to rally on increased demand.

The U.S. economy grew at 2.1% in third-quarter 2019, exceeding the initial estimate of 1.9%. At the same time, consumer confidence levels remained high, thanks to almost a 50-year low unemployment level, scarce layoffs and steady rise in wages. These will certainly improve consumer outlays as well. Moreover, in November, U.S. employers added 266,000 new jobs, after an upwardly revised 156,000 gains in October. The latest number beat market expectations of 180,000.

Builder Confidence & Housing Starts Signal Bright Future

The upbeat December U.S. homebuilder sentiment and housing starts data for November has instilled confidence among investors. Per the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), confidence level among builders jumped five points to 76 in December from the revised November reading of 71. Notably, the December reading marked the highest level since June 1999.

All the three indices registered gains in December. A gauge of present sales conditions rose seven points to 84 from November. Traffic of prospective buyers also increased four points to 58 and sales predictions for the next six months inched up by a point to 79.

Meanwhile, per the Commerce Department report, housing starts improved 3.2% in November from October to a seasonally adjusted annual rate of 1.365 million. Housing starts for single-family homes and multifamily structures increased 2.3% and 2.4%, respectively. Along with that, October’s construction of new homes was revised to 1,323,000 from the previously reported 1,314,000.

The uptrend in housing starts is likely to continue in 2020. Fannie Mae’s Economic and Strategic Research Group believes that growth in single-family housing starts will increase to 10% during 2020 from 1% annual growth registered in 2019.

Millennials: A Major Growth Driver

Industry watchers think the long-term prospects of housing remain bright because millennials are rapidly entering prime household formation age. Moreover, as more and more millennials are leaving their parents’ home, a sharp spike in household formation is likely to translate into higher demand for new homes. This could result in a significant spurt in demand over the next five to 15 years.

5 Top Picks

In view of the aforementioned positives, we have selected five housing stocks that investors may take a look at. We have chosen the stocks with the help of the Zacks Stock Screener.  These stocks carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

PulteGroup, Inc. PHM: This leading homebuilding and financial services company currently sports a Zacks Rank #1. Earnings estimate for 2020 are expected to grow 9.4% year over year. It has a long-term expected earnings growth rate of 8%. Year to date, the company’s shares have gained 48.5%.

Meritage Homes Corporation MTH: This leading national homebuilder primarily engages in construction and sale of single-family houses in entry-level and move-up markets. Earnings estimate for 2020 are expected to grow 20.3% year over year. The Zacks Rank #1 company has three to five year expected earnings growth rate of 9%. Year to date, the company’s shares have appreciated 68%.

M/I Homes, Inc. MHO: This leading builder of single-family homes currently sports a Zacks Rank #1. Earnings estimate for 2020 are expected to witness 5.3% growth year over year. Year to date, the company’s shares have soared 90%.

RH RH operates as a retailer in home furnishings. It offers products in various categories, including furniture, lighting, textiles, bathware, décor, outdoor and garden, tableware, and child and teen furnishings. The company currently has a Zacks Rank #1. Earnings estimate for fiscal 2020 are expected to witness 18.5% growth year over year. It has a long-term expected earnings growth rate of 17.8%. Year to date, the company’s shares have surged 86.2%.

D.R. Horton, Inc. (DHI - Free Report) : This leading national homebuilder currently sports a Zacks Rank #2. Earnings estimate for 2020 are expected to witness 9.7% growth year over year. It has a long-term expected earnings growth rate of 11.8%. Year to date, the company’s shares have risen 51%.

Zacks Top 10 Stocks for 2020

In addition to the stocks discussed above, would you like to know about our 10 top tickers for the entirety of 2020?

These 10 are painstakingly hand-picked from over 4,000 companies covered by the Zacks Rank. They are our primary picks to buy and hold. Start Your Access to the New Zacks Top 10 Stocks >>

In-Depth Zacks Research for the Tickers Above

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D.R. Horton, Inc. (DHI) - free report >>