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Homebuilders Rebound in Thursday Trading

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Shares of some top homebuilding companies jumped during trading session on Thursday, Jun 13, as the U.S. new home sales continued its upward swing and reflected potential for further improvement. Subsequently, the broader housing market enjoyed a strong rally and the SPDR S&P Homebuilders (XHB) jumped 3.63%.

Overall, the U.S. housing market has seen significant upside in new home construction activity since mid-2012. U.S. home sales are rising as low interest rates and increased rentals have improved the affordability of homes. However, supply remains limited by low home inventories, both for new and existing homes. On top of that, strong market demand has been further pushing the home prices.

The National Association of Home Builders/Wells Fargo Housing Market Index (:HMI), known as the homebuilder sentiment index, improved by 3 points to 44 in May after witnessing a slight decline in April. The improvement in May reflects better new home sales and expectations for the future.

Here are a few stocks that witnessed a significant rebound on Thursday:

D.R. Horton, Inc. (DHI), carrying a Zacks Rank #1 (Strong Buy), rose 5.2% to $23.66 on Thursday. This homebuilder has been seeing significant improvement in profitability on the back of geographic diversity, solid cost discipline, sound balance sheet, improved liquidity position, better pricing power as well as rising home inventories and land position.

PulteGroup, Inc. (PHM) rose 4.65% to $20.94 on Thursday. This Zacks Rank #2 (Buy) stock is gaining largely from its significant land positions, broad geographic and product diversity, solid operating leverage, and better capital position.

Toll Brothers (TOL) rose 4.06% to $33.04 on Thursday. The company’s focus on raising the quality and the luxury quotient of its homes gives it a competitive advantage. The stock currently carries Zacks Rank #3 (Hold).

Lennar Corporation (LEN), which carries a Zacks Rank #3 (Hold), rose 5.47% to $38.73 on Thursday. We believe that the company is performing better than its peers by increasing selling prices, improving volumes, making opportunistic land acquisitions and consistently delivering decent profit margins. In addition to its homebuilding operations, Lennar’s multiple platforms including Rialto, Mutlifamily and Financial Services, are also driving the company’s growth.

Smaller homebuilders like The Ryland Group, Inc. (RYL), carrying Zacks Rank #1 (Strong Buy); Meritage Homes Corporation (MTH), carrying Zacks Rank #1 (Strong Buy), and MDC Holdings Inc. (MDC), carrying Zacks Rank #2 (Buy), also rose during Thursday’s trading session. While RYL rose 7.16% to $42.95, MTH rose 6.05% to $46.80 and MDC went up 5.59% to $35.72.

Though overall new home sales are expected to continue rising in future months, rising input costs are a concern. Building material and labor costs are expected to inflate. As housing starts accelerate, both labor and construction material costs would continue to experience upward pricing pressure, curbing profitability of homebuilders. Moreover, difficulty in obtaining construction loans and tightened lending standards are making it tough for homebuilders, especially the smaller ones, to effectively respond to increasing demand.

Despite these headwinds, recovery of the housing market is one of the bright spots on the path to overall economic recovery. Only time will tell if the industry can sustain the growth trend.

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