Builder Sentiment Gaining Ground: 4 Top Housing Picks
Homebuilders continue to fly high buoyed by strong demand for housing despite continued challenges stemming from supply-chain disruptions and labor shortages. Accelerating home prices and prolonged delays do not seem to affect the home-buying spree of Americans.
According to the National Association of Home Builders (“NAHB”) report released on Tuesday, the monthly Housing Market Index (HMI) reading leaped three points to 83 in November from September. This marked the third consecutive month of a sequential rise for the index.
The November 2021 reading was, however, down seven points from the year-ago period. Yet, all three HMI components grew sequentially this month. Current sales conditions increased three points to 89. Buyer traffic rose three points to 68 and sales prediction over the next six months was steady at 84. Importantly, the HMI gauge of future sales expectations remained in the 80s, signaling persistent growth in housing demand this year.
Various homebuilding companies have been registering gains from the positive momentum of the industry. Notable among them are Meritage Homes Corporation MTH, Beazer Homes USA, Inc. BZH, Toll Brothers, Inc. TOL and TRI Pointe Group Inc. TPH.
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Let's Check Out the Pros & Cons of the Industry
Low existing homes for sale and strong underlying demand for housing raise optimism despite headwinds like rising costs and a persistent shortage of skilled labor that continues to vex builders. Labor and building lot access remain key constraints for housing supply. Hence, this improved confidence among builders is not rendering a higher construction pace.
NAHB Chief Economist Robert Dietz noted, “Lot availability is at multi-decade lows and the construction industry currently has more than 330,000 open positions. Policymakers need to focus on resolving these issues to help builders produce more housing to meet strong market demand.”
Nevertheless, builders are keen on keeping the construction pace in tandem with the rising demand. They are slowing sales in order to make deliveries on time.
New single-family home demand has seen a significant recovery throughout the country amid widespread stay-at-home orders, with homebuilders benefiting from the same. Lower interest rates have helped the company deliver a solid performance.
Markedly, the 30-year fixed-rate mortgage averaged 2.98%, with an average of 0.7 point for the week ended Nov 10, 2021, down from the last week when it averaged 3.09%. In the year-ago period, the 30-year fixed-rate mortgage averaged 2.84%.
How Homebuilding Industry Will Fare
The Zacks Building Products - Home Builders currently falls within the top 30% (75 out of 253 industries) of the Zacks Industry Rank, which hints at further growth.
Freddie Mac pointed out, “Despite the re-acceleration of economic growth, the recent bond rally drove mortgage rates down for the second consecutive week. These low mortgage rates, combined with the tailwind of first-time homebuyers entering the market, means that purchase demand will remain strong into next year.”
As purchasing a new home or refinance seems to benefit from the current rate environment, we are suggesting a few homebuilding stocks that are likely to gain, given the ongoing housing tailwinds.
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 four 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 translate into rapid price appreciation. You can see the complete list of today’s Zacks #1 Rank stocks here.
Meritage Homes: Based in Scottsdale, AZ, Meritage Homes is one of the leading designers and builders of single-family homes. Its focus on entry-level LiVE.NOW homes has been a major driving factor. The Zacks Consensus Estimate for Meritage Homes' 2021 earnings has moved up 3% over the past 30 days.
Meritage Homes currently sports a Zacks Rank #1. The stock has gained 42.5% year to date (YTD), outperforming the industry’s 24.6% rally. Earnings are expected to grow 74.6% in 2021 and 21.2% for the next.
Beazer Homes USA: This Atlanta-based homebuilder continues to gain from strong operational execution and persistent strength in the housing market. This has helped Beazer Homes to register significant gains in operating margin and adjusted EBITDA, leading to full-year 2021 net income that more than doubled from the prior year.
Beazer Homes currently sports a Zacks Rank #1. The stock has gained 46.4% YTD. Earnings are expected to grow 23.7% in fiscal 2022 and 6.4% for fiscal 2023.
Toll Brothers: The company designs, builds, markets, sells, and arranges finance for a range of detached and attached homes in luxury residential communities in the United States. Toll Brothers primarily rides on limited competition in the market, and the strategy of broadening product lines, price points as well as geographies.
Toll Brothers carries a Zacks Rank #2 at present and the stock has gained 48.5% YTD. Earnings estimates for the current year have increased 0.3% over the past 30 days. Earnings are expected to grow 80.6% this year and 43.9% for the next.
TRI Pointe Group: This Irvine, CA-based homebuilder designs, constructs, and sells single-family detached and attached homes in the United States. Robust demand and pricing as well as improved operating leverage have been driving TRI Pointe's performance. Cost-cutting initiatives implemented earlier this year and focus on entry-level buyers have been adding to the positives.
TRI Pointe, carrying a Zacks Rank #2 at present, has gained 50.3% YTD. The Zacks Consensus Estimate for its 2021 earnings has been upwardly revised by 8.6% over the past 30 days. Earnings for 2021 and 2022 are expected to grow 80.2% and 9.6%, respectively.
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Toll Brothers Inc. (TOL) : Free Stock Analysis Report
Meritage Homes Corporation (MTH) : Free Stock Analysis Report
Beazer Homes USA, Inc. (BZH) : Free Stock Analysis Report
Tri Pointe Homes Inc. (TPH) : Free Stock Analysis Report
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