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New Home Sales Surge to 16-Month High in March: 5 Top Picks

Shrabana Mukherjee

Sales of new homes in the United States jumped to a 16-month high in March, marking the third straight monthly increase. Declining mortgage rates, moderating home prices, rising wages and the Federal Reserve’s dovish stance are helping the U.S. housing market to regain its footing.

iShares U.S. Home Construction ETF ITB gained 1.3% while the SPDR S&P Homebuilders ETF XHB increased 1.1%. Shares of leading homebuilders such as Toll Brothers, Inc. TOL, M/I Homes, Inc. MHO, D.R. Horton Inc. DHI and Beazer Homes USA, Inc. BZH surged 1.1%, 1.4%, 1.6% and 3.2%, respectively, in the last session.

Key Takeaways

The Commerce Department said on Tuesday that sales of newly constructed single-family homes, accounting roughly 10% of all U.S. home sales, grew 4.5% from the February tally to a seasonally adjusted annual rate of 692,000 units last month — the highest level since November 2017. Moreover, March sales came in above the consensus forecast of 645,000 and were 3% higher than March 2018. Notably, February’s sales pace was revised down to 662,000 units from the previously reported 667,000 units.

From the beginning of 2019, new-home sales are up just 1.7% yet stronger than the same period last year.

Regionally, sales in the South, which accounts for the majority of new home sales, advanced 3.6% in March to their highest level since July 2007. Sales in the Midwest soared 17.6%, while that in the West jumped 6.7% from the February figure. However, sales in the Northeast dropped 22.2%.

Meanwhile, median sales price for March dropped 9.7% from the comparable period a year ago to $302,700, the lowest level since February 2017.

Again, the supply of new homes decreased 0.3% from February to 344,000. However, housing inventory increased 15.8% from a year ago. It would take just six months to deplete the current supply of homes, down from 6.3 months in February.

Strong readings in March clearly suggest that sales of new homes were not impacted by supply disruptions like sales of previously owned homes. Notably, other March data came in less bullish, as existing home sales were weighed down by a persistent shortage of lower-priced houses and housing starts slumped to the slowest pace since May 2017.

Declining Mortgage Rates: A Boon

Although mortgage rates increased last week or for the third consecutive week, it remains lower than a year ago. This must have lured more buyers in the key spring selling season. The average U.S. rate for a 30-year fixed mortgage is 4.17% for the week ending Apr 18, according to the latest Freddie Mac Primary Mortgage Market Survey. This is up from the previous week’s 4.12% but down from 4.47% a year ago.

After rising nearly 5% in November 2018, average mortgage rates are trending downward, offering a major boost to home sales after a torrid second half of 2018.

Meanwhile, Mortgage Bankers Association Vice President of Economic and Industry Forecasting Joel Kan noted that purchase activity remained robust, reaching its highest level since April 2010. This surely reflects of a strong spring homebuying season.

A classic example of the recent positive housing trend can well be traced through the first-quarter earnings numbers. On Tuesday, PulteGroup Inc. PHM reported better-than-expected first-quarter 2019 earnings. Shares of the company gained 3.7%, following the earnings release. “Helped by the recent decline in mortgage rates, homebuyers have been steadily returning to the market after a period of slowing demand that began in the second half of 2018,” said Ryan Marshall, President and CEO of PulteGroup.


Picking the Right Stocks

Owing to the month-to-month volatile figures, investment in the construction sector at times becomes difficult. Investors can still bet on some construction stocks that can counter market headwinds and come up with a convincing bottom line. But it might be an uphill task to pick the right stocks for greater investment rewards amid worries. This is where our Zacks Stock Screener comes in handy.

We have shortlisted construction stocks that have a Zacks Rank #1 (Strong Buy) or 2 (Buy) and other relevant metrics. You can see the complete list of today’s Zacks #1 Rank stocks here.

NVR, Inc. NVR, Reston, VA-based homebuilder currently sports a Zacks Rank #1. The company has a three-five year expected EPS growth rate of more than 10% and a solid earnings surprise history. It beat earnings estimates in each of the trailing four quarters, the average positive surprise being 17.6%.

M.D.C. Holdings, Inc. MDC: This Denver, CO-based homebuilder currently carries a Zacks Rank #2. Estimates for 2019 have increased 1% over the past seven days, reflecting analysts’ optimism over the company’s earnings growth potential.

Williams-Sonoma, Inc. WSM: This specialty retailer of high-quality products for home currently carries a Zacks Rank #2. Earnings estimates for 2019 have increased 3.1% over the past 30 days. Williams-Sonoma surpassed earnings estimates in all of the trailing four quarters, the average positive surprise being 9.6%.

Universal Forest Products, Inc. UFPI: This Grand Rapids, MI-based company designs, manufactures and markets wood and wood-alternative products. The company currently carries a Zacks Rank #2 and earnings estimates have climbed 1.9% over the past 30 days for 2019. Earnings are expected to grow 14.2% in 2019 and 13.3% in 2020.

Trex Company, Inc. TREX: This Winchester-based company manufactures and distributes wood/plastic composite products, and related accessories. This Zacks Rank #2 company’s earnings are expected to increase 8.1% this year and 14.4% in the next. The company beaten earnings estimates in the trailing four quarters, the average positive surprise being 11.2%.

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