Builder Confidence Springs Back in July: 5 Top Housing Picks

Homebuilders’ confidence has rebounded to pre-pandemic levels after tumbling during the early stages of the COVID-19 outbreak. This sends out a strong signal that the housing market is set for a post-COVID recovery spell.

According to the National Association of Home Builders (“NAHB”) report released on Thursday, monthly Housing Market Index (HMI) reading leaped 14 points to 72 in July from June. Although the index plunged in April to the lowest since 2012, it has been improving since May. Low existing homes for sale and strong underlying demand for housing raise optimism despite headwinds like rising costs and continued shortage of skilled labor continuing to vex builders.

The July 2020 reading was also up seven points from the year-ago period. All three HMI components grew sequentially in July. Current sales conditions increased 16 points to 79. Buyer traffic rose 15 points to 58 and sales prediction over the next six months rose seven points to 75. Importantly, the HMI gauge of future sales expectations remained in the 70s, signaling at continued growth in housing demand this year.

NAHB Chairman, Chuck Fowke, noted, “builders in the Northeast and the Midwest are benefiting from demand that was sidelined during lockdowns in the spring. Low interest rates are also fueling demand, and we expect housing to lead an overall economic recovery.”

Mortgage Rates Drop Below 3% for First Time

Record-low mortgage rates have been spurring buying activities in recent times despite continued economic uncertainties and high unemployment arising from the pandemic. According to the latest data released Thursday by Freddie Mac, the 30-year fixed-rate average declined to 2.98%. This is the first time that this rate has fallen below 3% in 50 years and seems to be a rare bright spot for the U.S. economy. It was 3.03% a week ago and 3.81% a year ago.

Also, mortgage applications, which fell at the start of the pandemic, have bounced back. The market composite index — a measure of total loan application volume — rose 5.1% for the week ending Jul 10, 2020, from a week earlier, according to a report by the Mortgage Bankers Association. The refinance index also climbed 12% from the previous week, marking the highest level in refinance activity over a month. On a year-over-year basis, refinance activity rose 107%.

Apart from low borrowing costs, the changing geography of housing demand has been supporting builder confidence. “New home demand is improving in lower density markets, including small metro areas, rural markets and large metro exurbs, as people seek out larger homes and anticipate more flexibility for telework in the years ahead,” Robert Dietz, chief economist at the NAHB, said in the report.

Costs Continue to Escalate

However, challenges like inventory shortage are prevailing in the U.S. real estate market. Also, rising material costs are quite a challenge. The NAHB report highlighted that lumber prices are trending at a two-year high owing to low inventories and high demand. Builders are also perturbed by rising costs for other building materials along with lot and skilled labor availability issues. This rapid increase in prices might have major implications on the industry.

Homebuilding Industry Performance

Overall, the U.S. housing market seems to be back on track, defying headwinds like low inventory levels as well as the ongoing broad-based economic and public health risks associated with the pandemic.

Over the past three months, the Zacks Building Products - Home Builders industry has widely outperformed the broader market (S&P 500), as you can see below. The industry falls within the top 6% (14 out of 251 industries) of the Zacks Industry Rank, which hints at further growth.

Key Housing Picks

Adding some housing stocks to your portfolio looks like a smart move at this point as there are myriad reasons to be optimistic about the broader housing sector, over both the short and the long term. With the help of the Zacks Stock Screener, we have zeroed in on five stocks that have a Zacks Rank #1 (Strong Buy) or 2 (Buy) with favorable metrics. A top Zacks Rank indicates that these stocks have been witnessing positive estimate revisions, which generally translates into rapid price appreciation. You can see the complete list of today’s Zacks #1 Rank stocks here.

Century Communities, Inc. CCS: This company is engaged in the design, development, construction, marketing, and sale of single-family attached and detached homes.

Zacks Rank #1

Price Performance Over Past 3 Months: Up 122.8%

Meritage Homes Corporation MTH: This company is a leading designer and builder of single-family homes.

Zacks Rank #1

Price Performance Over Past 3 Months: Up 113.5%

Taylor Morrison Home Corporation TMHC: Headquartered in Scottsdale, AZ, this homebuilder is engaged in building single-family detached and attached homes for first-time buyers, move-up families to luxury and active adult customers.

Zacks Rank #1

Price Performance Over Past 3 Months: Up 103.2%

D.R. Horton, Inc. DHI: This 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.

Zacks Rank #1

Price Performance Over Past 3 Months: Up 63.3%

TRI Pointe Group Inc. TPH: This Irvine, CA-based homebuilder designs, constructs and sells single-family detached and attached homes in the United States.

Zacks Rank #1

Price Performance Over Past 3 Months: Up 64%

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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