In more disappointing news for the housing sector, U.S. housing starts declined in May. Moreover, the National Association of Home Builders’ (NAHB) home builder confidence index declined for the first time this year in June. However, both reports should not be taken at face value, since there is enough evidence in them to suggest that the housing sector is poised for a rebound.
First, housing starts for March and April have been revised upward. Meanwhile, building permits have increased, indicating that the sector is gaining from the strong decline in mortgage rates.
Further, last month’s dip in homebuilder confidence is largely attributable to the fear of fresh tariffs on Mexican imports, a threat which no longer exists. Also, the sector is set to gain from rate cuts rates to occur later this year. This is why it is prudent to invest in stocks set to gain from the upcoming housing rebound.
Building Permits, Starts for March & April Rise
In May, housing starts declined by 0.9% to a seasonally adjusted rate of 1.269 million units. However, the figure is considerably higher than the estimated level of 1.235 million units. Last month’s decline was primarily attributable to a 6.4% plunge in single-family homebuilding. The metric, which makes up most of the housing market, declined to 820,000 units.
However, a large part of the decline is attributable to torrential rain and significant flooding in several parts of the United States. Meanwhile, building permits advanced 0.3% to 1.294 million units, marking the second straight monthly increase.
Further, permits for single-family homes increased for the first time in five months. The metric increased 3.7% to a pace of 815,000 units, posting a 7.7% increase in the South — the largest since December 2016. Gains for this forward-looking indicator imply that better times are coming for the sector.
Housing Market Sentiment Surges, Mortgage Rates Slide
In June, the NAHB home builder confidence index declined by 2 points to 64. The decline was largely attributable to the specter of fresh tariffs on Mexican imports. This is why the decline is likely a one-off event. The index has remained in the low- to mid-sixties, a considerably high level, till now this year and May’s was the highest reading since October 2018.
Meanwhile, independent research firm Pulsenomics’ Housing Confidence Index hit a five-year high of 71.65 in the first quarter. According to the firm’s founder, Terry Loebs, this is attributable to improving wage growth and lower mortgage rates. The U.S. 10-year note’s yield, which is tracked by fixed-rate mortgages, has plunged this year, a major positive for potential homeowners.
Despite the decline in housing starts for May, the housing sector seems set for a rebound over the next few months. This is borne out by the increase in building permits, particularly for single-family homes. Steady wage gains and low mortgage rates are helping to attract several prospective homeowners into the housing market.
This is why it makes sense to invest in stocks set to gain from the coming rebound in housing. However, picking winning stocks may prove to be difficult.
This is where our VGM Score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM Score.
We have narrowed down our search to the following stocks based on a good Zacks Rank and VGM Score of B.
PulteGroup Inc. (NYSE:PHM) engages in the homebuilding and financial services businesses primarily in the United States.
PulteGroup has a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for the current year has improved by 6.6% over the past 60 days.
NVR, Inc. (NYSE:NVR) is engaged in the construction and sale of single-family detached homes, townhomes and condominium buildings, all of which are primarily constructed on a pre-sold basis.
NVR has a Zacks Rank #1. The company has expected earnings growth of 1.8% for the current year. The Zacks Consensus Estimate for the current year has improved by 12.2% over the past 60 days.
BMC Stock Holdings, Inc. (NASDAQ:BMCH) is a distributor of lumber and building materials to building contractors in the United States.
BMC Stock Holdings’ Zacks Consensus Estimate for the current year has improved by 0.6% over the past 30 days. The stock has a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
U.S. Concrete, Inc. (NASDAQ:USCR) operates as a provider of ready-mixed concrete, and concrete-related products and services to the construction industry in the United States.
U.S. Concrete has a Zacks Rank #2 (Buy). The company has expected earnings growth of 35.4% for the current year. The Zacks Consensus Estimate for the current year has improved by 1.7% over the past 60 days.
Builders FirstSource, Inc. (NASDAQ:BLDR) is a leading supplier and manufacturer of structural and related building products for residential new construction in the United States.
Builders FirstSource has a Zacks Rank #2. The company has expected earnings growth of 0.4% for the current year.
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