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4 Stocks to Buy on Record Low Mortgage Rates

The pandemic-hit economy is slowly getting back on track, with the homebuilding industry gaining strength. A string of factors, which range from record low mortgage rates to a low interest rate environment and more construction activity, are pushing the sector ahead. The current environment, therefore, makes it ideal for aspiring homebuyers to step into the market again.

This is why investors keen on benefiting from these affirmative factors could invest in construction-related stocks.

30-Year Mortgage Hits Fresh Lows

According to Freddie Mac, the 30-year fixed-rate mortgage averaged 3.07% for the week ending Jul 2, much lower than the average rate of 3.75% from the year-ago period. The average of 3.07% is a record new low for the 30-year mortgage rate.

Just two weeks ago, the benchmark 30-year mortgage rate had stooped to its previous record low of 3.13%. In fact, mortgage rates have dropped to historic lows many times so far this year, owing to the pandemic-hit economy.

In addition, the 15-year fixed-rate mortgage also hit an average of 2.56% in the week ending Jul 2 from 2.59% last week, whereas the 5-year Treasury-indexed hybrid adjustable-rate mortgage declined by eight basis points to reach 3%.

Factors Pushing Homebuilding Industry

The first affirmative factor boosting the homebuilding industry right now is the near-zero interest rate. The Federal Reserve decided to keep the federal funds rate unchanged, earlier in June. The central bank had decided on these rates in mid-March in a bid to bring the economy back on track after being hit hard by the pandemic. The rates (currently in the range of 0% to 0.25%) are expected to stay at this level for the next two and a half years.

When the Fed raises rates, it becomes more expensive for banks and other financial institutions to lend money. Therefore, these higher costs may be passed on to consumers in the form of higher interest rates, which are reflected in mortgage rates as well. When interest rates are low, homebuyers aren’t burdened with these higher expenses. This is why a low-interest rate environment is beneficial for homebuyers.

The effect of the low-interest rate was already witnessed in May. According to the U.S. Census Bureau and the U.S. Department of Housing and Urban Development, new residential salesfor the said month (reported at 676,000) were 16.6% higher than the revised April rate of 580,000. In addition, the said figure is 12.7% higher than the May 2019 estimate of 600,000.

Finally, the rise in construction activity was also witnessed in the sector’s new employment in May and June. New job additions in the country were impressive over the past two months, with construction employment rising by 158,000 in June, following a gain of 453,000 in May, per the U.S. Bureau of Labor Statistics.

Also, according to the National Association of Realtors, pending home sales also made a record comeback in May, witnessing a surge in contract activity after two consecutive months of declines because of the pandemic. The Pending Home Sales Index, which is a forward-looking indicator of home sales based on contract signings, increased 44.3% to 99.6 in May.

4 Stocks to Buy

We have, therefore, chosen four stocks that could gain from the aforementioned factors. All these stocks belong to the Zacks Constructionsector and carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Meritage Homes Corporation MTH is a designer and builder of single-family homes. Meritage Homes has an expected earnings growth rate of 3.4% for the next year. The company, which carries a Zacks Rank #1, belongs to the Zacks Building Products - Home Builders industry. The Zacks Consensus Estimate for the company’s current-year earnings has moved 6.4% north in the past 60 days.

U.S. Concrete, Inc. USCR is a producer and marketer of ready-mixed concrete, aggregates and products and services related to concrete. U.S. Concrete has an expected earnings growth rate of 12.9% for the next year. The company, which carries a Zacks Rank #1, belongs to the Zacks Building Products - Concrete and Aggregates industry. The Zacks Consensus Estimate for the company’s current-year earnings has moved north by more than 100% in the past 60 days.

D.R. Horton, Inc. DHI is a homebuilding company. D.R. Horton has an expected earnings growth rate of 7.5% for the current year. The company, which carries a Zacks Rank #1, belongs to the Zacks Building Products - Home Builders industry. The Zacks Consensus Estimate for the company’s current-year earnings has improved 0.7% in the past 60 days.

Armstrong Flooring, Inc. AFI is a designer, manufacturer and marketer of durable flooring products used in the construction and renovation of commercial, residential and institutional buildings. Armstrong Flooring has an expected earnings growth rate of 11.5% for the current year. The company, which carries a Zacks Rank #2, belongs to the Zacks Building Products - Wood industry. The Zacks Consensus Estimate for the company’s current-year earnings has moved 41.1% north in the past 60 days.

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