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Homebuilder Confidence Rebounds From 3-Year Low: 4 Picks

Swarup Gupta

For the first time in the last few months, the homebuilder market is showing signs of recovery. The National Association of Homebuilders’ (NAHB) housing market index recovered from its lowest level in three months in January. The rebound, largely attributable to the recent decline in mortgage rates, is providing the much-needed respite to buyers.

Despite the economy’s continuing resilience, the housing market has remained a soft spot, primarily due to the Fed’s repeated rate hikes. Now, the NAHB believes that a strong job market and favorable demographics could boost housing demand in the months to come. Investing in stocks gaining from the budding housing recovery looks like a prudent option at this point. 

Mortgage Rate Drop Propels Rebound

The NAHB’s monthly building sentiment index increased 2 points to 58 in January. The recovery comes after two consecutive monthly drops and exceeded economic research firm Econoday’s forecast of a 1-point rise. In December, the index had plummeted to its lowest level in more than three and a half years.

Coming to the index’s three major components, current sales conditions increased 2 points to 63. Meanwhile, sales expectations for the next six months increased 3 points to 64 while the metric of buyer traffic inched up 1 point to 44.

The decline in mortgage rates, which started in November, is finally having a visible impact on homebuilding sentiment. On Jan 10, Freddie Mac announced that the 30-year fixed-rate mortgage rate had plummeted to a nine-month low.

And on Jan 16, the Mortgage Bankers Association said mortgage purchase applications had exceeded their highest level in more than eight years. According to NAHB Chairman Randy Noel: “The gradual decline in mortgage rates in recent weeks helped to sustain builder sentiment.”

Strong Labor Market, Low Rates to Sustain Demand

For quite some time now, the housing sector has been the American economy’s Achilles heel. While the economy remained resilient and the job market went from strength to strength, rate hikes from the Fed weighed heavily on the sector.

Now, wider economic strength could sustain demand in the near future. Per Noel: “Low unemployment, solid job growth and favorable demographics should support housing demand in the coming months.”

If mortgage rates remain low, this spring’s home purchase season could be a good one. According to the Mortgage Bankers Association’s chief economist Mike Fratantoni, the government shutdown has heightened uncertainty, while volatile equity trading has intensified the situation.

Meanwhile, the Fed has turned dovish amid a slowdown in global growth and chaos likely to result from a possible “no-deal” Brexit. Taken together, these factors could keep rates from rising in the near term. If inventory grows and the job market remains resilient, the spring homebuying period could be promising this time around, feels Fratantoni.

Our Choices

January’s rebound in homebuilding confidence provides fresh hope to a sector, which has failed to build on the strength of the economic recovery. A decline in mortgage rates has fueled the current upsurge. With rates likely to remain low, a strong labor market is likely to bolster demand in the near term.

Investing in stocks likely to gain from the improvement in homebuilder sentiment seems to be a smart move. However, picking winning stocks may 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.

RH RH is a leading luxury retailer in the home furnishing space.

RH has a VGM Score of A. The company’s expected earnings growth for the current year is more than 100%. The Zacks Consensus Estimate for the current year has improved by 10.2% over the last 60 days. The stock sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Lumber Liquidators Holdings, Inc. LL is a multi-channel specialty retailer dealing in hardwood flooring, and related enhancements and accessories.

Lumber Liquidators carries a Zacks Rank #2 (Buy) and has a VGM Score of A. The Zacks Consensus Estimate for the current year has improved by 0.6% over the last 30 days.

Arcosa, Inc. ACA is a manufacturer of infrastructure-related products and services, which serves construction, energy and transportation markets.

Arcosa has a Zacks Rank #2 and VGM Score of B. The company has expected earnings growth of 2.9% for the current year.

Lennox International Inc. LII is a provider of climate control solutions on an international scale.

Lennox International has a Zacks Rank #2 and VGM Score of B. The company has expected earnings growth of 30.7% for the current year. The Zacks Consensus Estimate for the current year has improved by 0.1% over the last 30 days.

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