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4 Construction Stocks to Bank on Record Low Mortgage Rates

The real estate market has staged an astonishing rebound over the past few weeks, despite the continued rise in new coronavirus cases and the pandemic’s impact on the job market especially during the early months of the year. The rebound is mostly backed by the Federal Reserve’s low interest rates, which impacted mortgage rates for a while. Homebuyers’ interest in the housing market during a pandemic, therefore, is well justified.

Let us, thus, consider some stocks for investment that belong to the construction sector and could gain should this trend prevail.

Mortgage Rates Set New Record Low

According to the latest data released by Freddie Mac this week, the 30-year fixed-rate average dropped to a historic low of 2.98%, marking a rate below 3% for the first time in 50 years. The reported mortgage rate is the lowest since Freddie Mac started to track mortgage rates in 1971. The rate averaged 3.81% a year ago.

A major reason behind low mortgage rates is the near-zero federal funds rate. In June, the central bank decided to keep the benchmark rates unchanged (as decided by the Fed in mid-March) to put the economy back on track. The rates, which are currently in the range of 0% to 0.25%, are expected to stay at this level for the next two and a half years.

Factors Pushing Up Housing Market

Although record low mortgage rates are the major reason why homebuyers are interested in the housing market, this isn’t the only factor propping housing up.

Aside from record low mortgage rates, the rise in employment in recent months gave a solid boost to the housing market. According to the U.S. Bureau of Labor Statistics, the nation's unemployment rate dropped to 11.3% in June.

Total nonfarm payroll employment increased by 4.8 million last month, which is far higher than the 2.5 million jobs added in May. In addition, employment in construction increased by 158,000 in June, following a gain of 453,000 new jobs in May.

Over-the-month job additions occurred in specialty trade contractors (+135,000), with job gains equally split between residential and non-residential components. New jobs were also added in construction of buildings (+32,000).

Mortgage application volume is also quite promising. According to the Mortgage Bankers Association’s seasonally adjusted index, total mortgage application volume increased 5.1% in the week ended Jul 10 compared with the week ended Jul 3. Of course, the reason behind this rise in application volumes is low mortgage rates.

An evidence of the roaring housing market lies in rising median home prices. Given the demand for new homes during the pandemic, median home prices rose 6.2% year over year in the week ended Jun 27, per the weekly data by realtor.com. Sales of new homes rose an astonishing 16.6% in May, according to the Commerce Department. Sales of new single-family homes rose to a seasonally adjusted annual rate of 676,000 in the month.

Finally, given the rise in consumer confidence in June, one has definitive hope for the U.S. housing market. The Conference Board’s consumer confidence index rose to 98.1 last month, largely pushed by optimism around an economic recovery.

4 Stocks to Buy

We have, therefore, chosen four stocks from the construction sector. All 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.

M.D.C. Holdings, Inc. MDC engages in the homebuilding and financial service businesses. M.D.C., which belongs to the Zacks Building Products - Home Builders industry, has an expected earnings growth rate of 14.4% for the next year. The Zacks Consensus Estimate for the company’s current-year earnings has moved 1% north in the past 60 days. The stock carries a Zacks Rank #1.

Meritage Homes Corporation MTH designs and builds single-family homes. Meritage Homes, which belongs to the Zacks Building Products - Home Buildersindustry, has an expected earnings growth rate of 1.2% for the next year. The Zacks Consensus Estimate for the company’s current-year earnings has moved 32.9% north in the past 60 days. The stock carries a Zacks Rank #1.

D.R. Horton, Inc. DHI is a homebuilding company. D.R. Horton, which belongs to the Zacks Building Products - Home Buildersindustry, has an expected earnings growth rate of 2.9% for the next year. The Zacks Consensus Estimate for the company’s current-year earnings has moved 7.2% north in the past 60 days. The stock carries a Zacks Rank #1.

Forterra, Inc. FRTA is a manufacturer and marketer of pipe and precast products. Forterra, which belongs to the Zacks Building Products - Concrete and Aggregates industry, has an expected earnings growth rate of 20% for the next year. The Zacks Consensus Estimate for the company’s current-year earnings has moved 8.7% north in the past 60 days. The stock carries a Zacks Rank #2.

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