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Builder Sentiment Posts Biggest Monthly Rise: Stocks in Focus

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The National Association of Home Builders and Wells Fargo yesterday announced that builder confidence for newly-built single-family homes marked the historically highest monthly increase in June. Per the latest Housing Market Index (HMI), sentiment among U.S. homebuilders jumped a striking 21 points to 58 this month from May.

With the easing of coronavirus-induced restrictions, homebuilders are feeling optimistic about the state of recovery despite tighter inventories. Almost every homebuilder in the country is projecting a housing rebound as the nation reopens with full strength. This is also evident from increasing mortgage applications and low interest rates.

On Jun 16, a few industry players like Hovnanian Enterprises, Inc., Beazer Homes USA, Inc., NVR, Inc. (NVR - Free Report) , M.D.C. Holdings, Inc. and D.R. Horton, Inc. gained 10.7%, 5.2%, 6.6%, 4.7% and 3.8%, respectively, following the news.

SPDR S&P Homebuilders ETF (XHB), iShares U.S. Home Construction ETF (ITB) and Invesco Dynamic Building & Construction ETF (PKB)  gained 2.8%, 2.8% and 1.9%, respectively, post the release of HMI.

Inside the Headlines

After being hurt by coronavirus-led shutdown since mid-March, the economy has gradually started gaining momentum. Following May’s strong reading, wherein all the three indices grew impressively, the indicator that gauges present sales conditions grew 21 points to 63 in June. Prospective buyer traffic rose 22 points to 43 and sales predictions for the next six months increased 22 points to 68.



The three-month moving averages for the regional HMI reading were also up in each region. Midwest grew 19 points to 51, South rose 20 points to 62, West gained 22 points to 66 and Northeast surged 31 points from the prior month to 48.

Increased Buyers Traffic Revives Hope

Buyer traffic improved impressively, gaining more than 100% in the past month, despite the fact that buyers didn’t step out of their homes and opted for virtual inquiries. Builders also reported that demand has increased more for families seeking single-family homes in inner and outer suburbs that feature lower-density neighborhoods.

Also, the recent price for homes has increased to the pre-coronavirus level, as indicated by Realtor.com in its Weekly Housing Trends View reported on Jun 11. The agency noted that the median U.S. listing price rose 4.3% year over year for the week ended Jun 6. “Home prices are back to their pre-COVID pace and we’re seeing listings spend slightly less time on the market than last week. But the housing market still needs more sellers in order to meet the surge in demand.” said chief economist of Realtor.com, Danielle Hale.

Mortgage applications for the purchase of a newly built home increased 10.9% year over year in May, per the Mortgage Bankers Association’s Builder Application Survey released on Jun 16. Also, the metric surged 26% from April after three straight months of  decline. The solid increase in new home purchase applications is another indication of a market recovery.

Per the recently released Lennar Corporation’s (LEN - Free Report) quarterly numbers, earnings per share for second-quarter fiscal 2020 surpassed the Zacks Consensus Estimate by 27.9% and jumped 27% from the year-ago quarter. The company stated that increased unemployment has compelled customers to move from rental apartments and densely populated areas to purchase homes. This further drove home sales growth in recent times. The company’s impressive quarterly view is also encouraging.

The Zacks Building Products - Home Builders industry has improved 97.6% in the past three months compared with the Zacks Construction sector and S&P 500 composite’s 58.9% and 27.4% rally, respectively.


 

However, increased demand trends and low inventory level are still not enough for a housing recovery. The market is still grappling with shortage of homes, land and labor. Per the U.S. Bureau of Labor Statistics report released on Jun 5, May unemployment rate was 13.3%. In the year-ago period, unemployment rate was 3.6%. Although the May rate was way better than analysts’ expectation and April 2020, it is still a concern for the overall economy.

Stocks to Consider on Solid Housing Prospects

Given anticipated V-shaped recovery in housing demand after the easing of the pandemic’s effects, investors might consider these homebuilding stocks on solid prospects.

Beazer Homes USA, Inc. (BZH - Free Report) : This leading national homebuilder currently sports a Zacks Rank #1 (Strong Buy). Earnings estimates for fiscal 2020 have moved 7.7% upward in the past 60 days. The company’s shares have appreciated 100.5% in the past three months compared with the industry’s 81.6% growth. You can see the complete list of today’s Zacks #1 Rank stocks here.

Meritage Homes Corporation (MTH - Free Report) : This leading designer and builder of single-family homes currently carries a Zacks Rank #2 (Buy). Earnings estimates for 2020 have increased 2.2% in the past seven days. In the past three months, the company’s shares have gained 126.9% compared with the industry’s 81.6% growth.

D.R. Horton, Inc. (DHI - Free Report) : This leading homebuilding company currently carries a Zacks Rank #3 (Hold). Earnings estimates for 2020 have increased 0.2% in the past seven days. The company’s shares have risen 85.7% in the past three months compared with the industry’s 81.6% rally.

Apart from homebuilding biggies, investors may also consider the following two home-furnishing stocks.

RH (RH - Free Report) : This leading luxury retailer in the home furnishing space currently sports a Zacks Rank #1. Its shares have gained 174.3% in the past three months compared with the industry’s 113% rally. The stock’s earnings estimates for the current year have witnessed an upward revision of 50.9% in the past 30 days.

Williams-Sonoma, Inc. (WSM - Free Report) : This multi-channel specialty retailer of premium quality home products holds a Zacks Rank #2. Earnings estimates for fiscal 2020 have increased 39.5% in the past 30 days. Shares of the company have surged 143.3% in the past three months compared with the industry’s 113% growth.

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