The U.S. Census Bureau and the Department of Housing and Urban
Development reported upbeat data on new single-family home sales
yesterday. Sales of new single-family houses increased 18.6% from
April's revised rate of 425,000 to a seasonally adjusted annual
rate of 504,000 in May. New home sales for the month of May
increased to the highest level in six years.
Home Sales Surge
The rise was also larger than expected as the consensus estimate
predicted it would improve to 439,000. This data comes close on the
heels of encouraging existing home sales data released on Monday.
Existing home sales rose 4.9% to a seasonally adjusted annual rate
of 4.89 million in May from an upwardly-revised 4.66 million in
Existing home sales increased at the fastest pace in seven months.
A strong labor market, expansion in inventories and drop in
mortgage rates were cited to be the reason behind strong growth in
Distressed Sales Decline
However, it is important to note that new home sales show great
variance month over month. Again, a closer look at existing home
sales data reveals that sales recorded in May are lower than the
year-ago figure of 5.15 million.
But a more optimistic picture emerges when we look at distressed
sales numbers. Foreclosures and short sales make up 11% of the
sales in May. According to the National Association of Realtors,
distressed sales have declined by seven percentage points over the
past year. Existing home sales have increased 3% compared to May
2013 when we exclude distressed sales.
Prices Increase Falls
The S&P/Case-Shiller Home Price Indices report revealed that
increase in home prices was slowing. The 10 and 20-city composite
indexes moved up 1% and 1.1% respectively during April. However,
annual increases have declined.
The 20-City composite index rose 10.8% year on year in April.
However, the rate of growth was lower than March's year-on-year
rise of 12.4%. It was even lower compared to the 13.7% increase
recorded in November last year.
A Sustainable Recovery
According to the chief economist of real estate site Trulia, just
3% of national home prices are undervalued when considering
long-term fundamental factors. Some markets, such as South
California are highly overvalued.
The Case-Shiller report is drawn from transactions concluded during
the period between February and April. This makes it a good
indicator of activity for the early part of the year. A decline in
price increases implies that the housing market may be stabilizing.
The ideal situation for home prices is where the interests of both
housing companies and homeowners are satisfied. Price increases do
not race ahead of wage increases and homebuilders make enough
profits to undertake new construction. Bubbles do not build up and
sudden corrections can be avoided. Based on Case Shiller pricing
data we could conclude that such an equilibrium may be on its way.
Established stocks with proven track records would be ideal stocks
in the current scenario. Below we present three housing stocks
which possess the potential to grow appreciably, each of which also
has a good Zacks rank.
DR Horton Inc.
) is one of the leading national homebuilders, primarily engaged in
the construction and sale of single-family houses both in the
entry-level and move-up markets. In fiscal 2013, the company closed
24,155 homes at an average sales price of $249,400.
The company's second-quarter fiscal 2014 results surpassed the
Zacks Consensus Estimate for both revenues and earnings. Adjusted
earnings of $0.38 per share in the second quarter of fiscal 2014
beat the Zacks Consensus Estimate of $0.34 by 11.8%. Earnings grew
18.8% year over year driven by improved homebuilding revenues and
strong margin expansion.
DR Horton Inc. holds a Zacks Rank #3(Hold) and has expected
earnings growth of 31.4%. The forward price-to-earnings ratio (P/E)
for the current financial year (F1) is 13.67.
) is engaged in homebuilding and financial services in the U.S. It
is considered to be one of the leading homebuilders within the
industry. Despite a diversified product portfolio, homebuilding
remains its core business.
Lennar's first-quarter fiscal 2014 adjusted earnings of $0.35 per
share beat the Zacks Consensus Estimate of $0.28 by 25.0%. Earnings
jumped 34.6% year over year driven by double-digit growth in
homebuilding revenues and solid margins.
Currently the company holds a Zacks Rank #3 (Hold) and has expected
earnings growth of 28%. It has a P/E (F1) of 16.28.
Toll Brothers Inc.
) builds luxury single-family detached and attached home
communities. It also constructs master planned luxury residential
resort-style golf communities principally on the land it develops
and improves. The company also caters to buyers above 50 years of
age, active adult buyers, second homebuyers and move up home
Toll Brothers reported adjusted earnings of $0.31 per share in the
second quarter of fiscal 2014, surpassing the Zacks Consensus
Estimate of $0.25 by 24%. Adjusted earnings increased significantly
from $0.07 in the prior-year quarter on the back of strong revenues
Apart from a Zacks Rank #3 (Hold), Toll Brothers has expected
earnings growth of 74.8%. It has a P/E (F1) of 20.92.
It may take some time before we can reach an unambiguous opinion on
the housing sector. But recent data suggests that a recovery is on
track. This is why these stocks would make good additions to your
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