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February Home Sales Rebound: 4 Stock to Buy Despite Fed Hike

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Sales of previously owned homes jumped in February, marking the first gain in the last three months. This means that more Americans are looking to buy homes despite rising prices and a limited availability of homes.

Exchange traded funds or ETFs that track the homebuilding industry jumped on Wednesday, after the news release. iShares U.S. Home Construction ETF ITB gained 1.6% while the SPDR S&P Homebuilders ETF XHB increased 0.9%. Meanwhile, PowerShares Dynamic Building & Construction Portfolio PKB was up 0.7%.

Shares of prominent homebuilders such as Beazer Homes USA Inc. BZH, D.R. Horton Inc. DHI, Toll Brothers, Inc. TOL, Lennar Corp. LEN and PulteGroup Inc. PHM surged 3.7%, 2.9%, 2.1%, 1.8% and 1.6%, respectively, in the last session.

Now, as the Federal Reserve (Fed) has adopted a more hawkish stance, do investors need to worry about the momentum of the U.S. housing market? The latest positive housing data undoubtedly reassures the industry’s strength courtesy of solid economic growth amid supply shortages.

February Existing Home Sales Data

As revealed by the National Association of Realtors (NAR), existing-home sales increased 3% in February to a seasonally adjusted annual rate of 5.54 million units from 5.38 million in January. Sales increased 1.1% from the year-ago level. This surge in existing-home sales (accounting for 90% of the market) after declining sales in the last two months indicates that competition will heat up during the traditional spring home-buying season.

Regionally, sales were mixed. Sales in the Northeast and Midwest plunged 12.3% and 2.4%, respectively. However, sales surged 11.4% in the West and increased 6.6% in the Midwest.

Meanwhile, February’s median sales price grew 5.9% from the comparable period a year ago to $241,700, marking the 72nd straight month of year-over-year gains.

Again, inventory continued to slip, leaving less homes for future sales. The supply of existing homes decreased 8.1% from the year-ago period. However, housing inventory increased 4.6% from January. It would take just 3.4 months to deplete the current supply of homes in the market, according to NAR.

Fed’s Hawkish Stance: A Boon or Bane for Housing?

As expected, the Fed raised its benchmark interest rate by a quarter point to a range of 1.5% to 1.75% in its first policy meeting under the new chief Jerome Powell, on March 21. The central bank also indicated that there will be at least two more hikes for 2018, highlighting its rising confidence that tax cuts and government spending will boost the economy. Fed officials see a stronger U.S. economy and signaled a slightly faster pace of interest rate hikes in the coming years.

Meanwhile, according to Freddie Mac, the average commitment rate for a 30-year, conventional, fixed-rate mortgage moved higher for the fifth straight month to 4.33% in February (highest since 4.34% in April 2014) from 4.03% in January.

Rising mortgage rates and high prices of homes from inventory squeeze are indeed creating hurdles for buyers (mostly first-time buyers). In February, first-time buyers comprised 29% of sales, which is down from 31% a year ago but unchanged from the prior month. However, NAR holds a bullish stance stating that a solid U.S. economy accompanied with a healthy labor market will help the housing market reap solid gains.

Lawrence Yun, NAR chief economist, pointed out, “Mortgage rates are at their highest level in nearly four years, at a time when home prices are still climbing at double the pace of wage growth.” He further added, “Homes for sale are going under contract a week faster than a year ago, which is quite remarkable given weakening affordability conditions and extremely tight supply. To fully satisfy demand, most markets right now need a substantial increase in new listings.”

Latest homebuilders’ confidence reading for March was also solid at 70 fueled by growing consumer demand. In spite of shortage in inventory, robust demand from a solid economy and cheerful job market is keeping the industry alive. With these strong economic fundamentals in place, the overall homebuilding picture is pretty encouraging for 2018.

Notably, following the two-day Federal Open Market Committee meeting, the Fed now expects faster economic growth of 2.7% this year, up from the forecast of 2.5% in December. For 2019, GDP growth is now expected to be 2.4%, up from the previously projected 2.1%. The Fed now projects the unemployment rate to fall to 3.8% this year from the present rate of 4.1%, which is a positive for the housing industry.

4 Homebuilding Stocks to Bet On

We have zeroed in on four homebuilding stocks that are worth investing in with solid growth potential amid above-mentioned woes.

Meritage Homes Corporation MTH is one of the leading homebuilders in the United States. The Zacks Consensus Estimate for earnings for the current year and the next have increased 7% and 5.9%, respectively, in the last 60 days, thus reflecting optimism about the stock’s prospects and substantiating its Zacks Rank #2 (Buy). The company’s EPS is expected to grow 30.4% in 2018 and 13.3% in 2019. You can see the complete list of today’s Zacks #1 Rank stocks here.

Lyon William Homes WLH is primarily engaged in design, construction, marketing and sale of single-family detached and attached homes in California, Arizona, Nevada and Colorado. The company carries a Zacks Rank #2 and earnings estimates for 2018 and 2019 have also gone up by 10.5% and 7.5%, respectively, in the last 30 days. It has an expected earnings growth rate of 38% for 2018 and 18% for 2019.

Beazer Homes USA, Inc. BZH, also a Zacks Rank #2 company, is among the country’s largest single-family homebuilders with a presence in Arizona, California, Delaware, Florida, Georgia, Indiana, Maryland, Nevada, North Carolina, South Carolina, Tennessee, Texas and Virginia. The consensus estimate for earnings for the current quarter has increased 21.4% in the last 60 days. It has an expected earnings growth rate of 112.5% for the current quarter.

M.D.C. Holdings, Inc. MDC is engaged in construction, sale and related financing of residential housing and acquisition and development of land for use in homebuilding activities. The company holds a Zacks Rank #2 and has witnessed 13.7% upward revision in earnings estimates for 2018 over the last 60 days. Earnings are expected to rise 15.9% in 2018 and 14.6% in 2019.

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