This year has been tough for homebuilders as they had to bear the brunt of elevated interest rates to curb relentless inflationary pressure. However, as September interest rate cut bets rose, mortgage rates dropped to their lowest level in more than a year.
With mortgage rates plummeting, things are looking brighter for housing players like PulteGroup, Inc. PHM, KB Home KBH and M/I Homes, Inc. MHO, making them enticing buys.
Lower Home Mortgage Rates
The average rate of the most-sorted 30-year fixed mortgage dropped to 6.47% for the week ending on Aug 8, from 6.73% last week, according to Freddie Mac. This is also the lowest level for the 30-year fixed-rate loan since May 2023. A year earlier, the average rate of the 30-year fixed mortgage was 6.96%.
The 15-year fixed mortgage averaged 5.63%, less than 5.99% in the prior week. The 15-year fixed-rate loan averaged 6.34% in the same period a year ago, added Freddie Mac.
Why Mortgage Rates Are Falling?
Mortgage rates tanked this week on the heels of turbulence in Wall Street after a less-than-promising jobs report raised concerns about a looming recession. Expectations that the Fed would dial back on its aggressive monetary policy and trim interest rates in September led to a decline in long-term bond yields, which dragged mortgage rates lower.
The steady slowdown in monthly price pressures from the year-ago levels has prompted Fed officials to contemplate an interest rate cut as early as fall. The Bureau of Economic Analysis noted that the personal consumption expenditures index advanced 2.5% year over year in June, less than May and April’s yearly gains of 2.6% and 2.7%, respectively.
Almost 55.5% of market participants are now expecting the Fed to trim interest rates by 50 basis points in the September policy meeting, with most of them anticipating a minimum of two rate cuts this year, per the CME FedWatch Tool (read more: Fed's September Rate Cut Bets Rise: NVDA, GOLD, PHM to Gain).
3 Housing Stocks to Gain: PHM, KBH, MHO
The decline in mortgage rates bodes well for housing stocks as it increases potential homebuyers’ purchasing power. Home buyers faced affordability issues this year, but with mortgage rates falling, the entire housing market dynamics have shifted from a seller to a buyer’s market.
But it’s just not the drop in mortgage rates that would boost the housing market. In reality, a housing market turnover is expected to increase as prospective buyers have ample cash for down payments. Millennials are also about to settle into a family life and move into a suitable home, boosting housing demand.
Given the positives, astute investors should place bets on solid housing stocks for encouraging returns. These stocks flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy) and a VGM Score of A or B. Here, V stands for Value, G for Growth, and M for Momentum, and the score is a weighted combination of these three metrics. Such a score allows you to eliminate the negative aspects of stocks and select winners. You can see the complete list of today’s Zacks #1 Rank stocks here.
PulteGroup – Has a Very Strong Return on Equity
PulteGroup primarily engages in homebuilding businesses in the United States. PulteGroup is cashing on the growing demand for entry-level homes, and its strategic customer-focused initiatives are boosting the profit margins.
PulteGroup has a Zacks Rank #2 and a VGM Score of B. The Zacks Consensus Estimate for PHM’s current-year earnings has increased 3.4% over the past 60 days. The company’s expected earnings growth rate for the current year is 13.3%.
PHM has a return on equity (ROE) of 25.7%. As a thumb rule, any ROE above 20% is typically considered very strong. This means the company has been able to generate profits proficiently.
KB Home – Has a Competitive Advantage
Well-known homebuilder KB Home’s Built-to-Order approach has given the company a competitive advantage over its peers. This approach provides buyers with plenty of choices and a personalized customer experience that helps the company generate higher revenues.
KB Home has a Zacks Rank #2 and a VGM Score of B. The Zacks Consensus Estimate for KBH’s current-year earnings has increased 4.6% over the past 60 days. The company’s expected earnings growth rate for the current year is 19.2%.
M/I Homes – Has a Good Net Profit Margin
M/I Homes is one of the leading builders of single-family homes. M/I Homes has a Zacks Rank #1 and a VGM Score of B. The Zacks Consensus Estimate for MHO’s current-year earnings has increased 7.7% over the past 60 days. MHO’s expected earnings growth rate for the current year is 20.8%.
The company is quite capable of generating the required profit from sales since MHO has a net profit margin of 12.7%, more than the industry’s 10.9%. Generally, a net profit margin of 10% and above is considered good.
Shares of PulteGroup, KB Home and M/I Homes have gained 18.3%, 27.6% and 3.4%, respectively, year to date.
Image Source: Zacks Investment Research
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