Housing Starts & Builder Confidence Solid: 4 Picks

Housing starts and building permits made an impressive comeback in January, after declining 8.2% and 0.1%, respectively, in December 2017, due to cold weather. Moreover, home builder sentiment is at 72, making us reasonably certain about the positive momentum in the industry.

Housing Starts Hit a 15-Month High

Per the latest jointly-released report from the U.S. Census Bureau and the U.S. Department of Housing and Urban Development, new home construction (housing starts) increased 9.7% to 1.33 million units (seasonally adjusted annual rate) in January 2018 from December 2017. This also marks the highest rise since October 2016. The figure improved 7.3% on a year-over-year basis, courtesy of a 3.7% rise in single-family housing starts and 23.7% spike in multi-family starts.

Moreover, residential building permits, an indicator of upcoming construction activity, increased 7.4% in January to an annualized rate of 1.34 million units from December. This marks the highest surge in more than 10 years.

Builders Remain Confident

U.S. homebuilders’ confidence remains unchanged at 72 in February. The figure improved from the year-ago level of 65. The National Association of Home Builders or NAHB/Wells Fargo Housing Market Index (HMI) includes builder perceptions of current single-family home sales, sales expectations for the next six months and traffic of prospective buyers. A reading above 50 is considered confident enough. The upside was driven by higher sales expectations in the future, which rose two points to 80. Traffic of prospective buyers were steady at 54, but the component gauging current sales conditions dropped one point to 78.

The current reading indicates that builders feel good about the recent tax cuts and have no qualms as such regarding the rising interest rates. Fueled by robust economic growth, Fed policymakers reckon three rate hikes in 2018, setting the stage for an increase in mortgage rates.

NAHB Chairman Randy Noel, a custom homebuilder from LaPlace, Louisiana, stated, "Builders are excited about the pro-business political climate that will strengthen the housing market and support overall economic growth."

Will the Upbeat Scenario Continue Through 2018?

The positive momentum is expected to continue in 2018, courtesy of an improving economy, modest wage growth, low unemployment levels, positive consumer confidence, a tight supply situation and escalating rent costs.

In spite of shortage in inventory, robust demand from a solid labor market is keeping the industry alive. General unemployment rates in the United States have been at a 17-year low of 4.1% for the fourth straight month, with around 200,000 jobs added in January 2018. Other hurdles such as rising prices, thanks to the limited land availability which is keeping the affordability in check. Again, homebuilders continue to struggle against higher material costs and a constrained mortgage environment.

The economy is also in a good shape. Gross Domestic Product (GDP) grew at a seasonally adjusted annual rate of 2.6% in the fourth quarter of 2017 following gains in the previous two quarters of more than 3%, per the “advance” estimate released by the Bureau of Economic Analysis.

President Trump aims to double economic growth through an ambitious stimulus program featuring tax cuts, deregulation and higher infrastructure spending. Although this may face various obstacles, we expect the plan to help the economy grow at a faster clip in 2018.

Housing Industry’s Stand

This positive momentum that the housing industry has been experiencing is evident from the improvement in its Zacks rank. The Zacks Homebuilding Industry has outperformed the broader market (S&P 500) in the past year. The industry has gained 38.6% compared with the S&P 500 index’s 16.7% rally. Notably, homebuilding ranks among the top 6% of all Zacks industries. Along with an impressive past performance of the industry, a favorable rank indicates that companies in this space are likely to benefit from positive factors.

Hence, it’s a wise idea to bet on a few housing stocks that are expected to cash in on this positive momentum.

Choosing the Right Stocks

Investors can bank on these housing stocks, which are making the most of positive housing momentum amid the ongoing adversities. We have chosen companies with the help of Zacks Stock Screener that flaunt a Zacks Rank #1 (Strong Buy) and 2 (Buy) and a Momentum Score of A or B. The Zacks Momentum Style Score indicates the best time to buy a stock and take advantage of its momentum with a highest probability of success. You can see the complete list of today’s Zacks #1 Rank stocks here.

M/I Homes, Inc. (NYSE:MHO) sports a Zacks Rank #2 and has a Momentum Score of B. Shares of the company have gained 37.6% compared with its industry’s rally of 32.9% in the past year.

Moreover, the company is witnessing upward estimate revisions — up 18.7% for 2018 and 18.2% for fiscal 2019 respectively — in the last 60 days. The Zacks Consensus Estimate, projects EPS growth of 45.5% for fiscal 2018.

Meritage Homes Corporation (NYSE:MTH) has a Zacks Rank #2 and a Momentum Score of A. Shares of the company have gained 38.4% in the past year.

Moreover, the company is witnessing upward estimate revisions — up 16.1% for 2018 and 13.5% for 2019 respectively — in the last 60 days. This reflects that analysts are optimistic about the stock’s prospects. Per the Zacks Consensus Estimate projects EPS growth of 30.4% for 2018. Again, the company’s EPS is projected to grow nearly 13.4% in the next three to five years.

D.R. Horton, Inc. (NYSE:DHI) has a Zacks Rank #2 and a Momentum Score of B. Shares of the company have gained 49.8% in the past year.

Moreover, the company is witnessing upward estimate revisions — up 15.5% for fiscal 2018 and 16.4% for fiscal 2019 respectively — in the last 60 days. The Zacks Consensus Estimate projects EPS growth of 36.1% for fiscal 2018. Again, EPS is projected to grow nearly 10% in the next three to five years.

Lennar Corporation (NYSE:LEN) holds a Zacks Rank #2 and has a Momentum Score of A. The company is witnessing upward estimate revisions — up 10.2% for fiscal 2018 and 12% for fiscal 2019 — in the last 60 days. The Zacks Consensus Estimate projects EPS growth of 38.9% for fiscal 2018. Again, EPS is projected to grow nearly 18.3% in the next three to five years.

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