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Housing Market Poised for a Rebound: 6 Great Picks

Swarup Gupta

In June, homebuilder confidence declined for the first time this year. Additionally, housing starts for May dropped, even though figures for the two preceding months were revised upward. These dismal readings for key housing indicators were largely attributed to trade-related worries and rising costs of construction.

However, conditions are ripe for a rebound in the American housing market. For one, strict regulation has caused mortgage delinquencies to plunge to a 20-year low in April. Mortgage rates themselves have held onto record lowers, boosting the spirits of prospective homeowners.

On the flip side, tighter supplies are still working against buyers. But this is good news for sellers since a robust economy is likely to trigger bidding wars and price appreciation, tilting the market in their favor. This is why it is a great time to invest in stocks which stand to benefit from a rebound in housing.

Housing Market Distress Falls to 20-Year Low

According to fresh data from real estate service provider CoreLogic, the so-called foreclosure inventory rate slipped to a 20-year low of 3.6 in April. Considering that CoreLogic’s data series starts from 1999, it could be the lowest for an even longer time span.

The reading clearly illustrates how strong regulatory control after the last housing crisis has created a lending environment which is nearly pristine. Some experts think that this is the precursor for another debacle, since things can only get worse from here. But there is a solid basis for these numbers.

According to CoreLogic, “a 50-year low in unemployment, rising home prices and responsible underwriting” are the primary reasons for the plunge in mortgage delinquencies. The new mortgage environment is significantly better than the pre-crisis era, where looser controls built a bubble of terrifying proportions.

Mortgage Rates Sticky at Long-Term Lows

According to Freddie Mac, the 30-year fixed-rate mortgage clocked in at an average of 3.75% for the July 11 week, flat with a week ago. As we enter the second half of the year, this key housing metric has witnessed only eight weekly increases. The fact that rates remain at their lowest in nearly two years is likely to boost the spirits of prospective homebuyers.

Mortgage rates have remained nearly flat in recent weeks due to multiple factors. According to Freddie Mac's chief economist Sam Khater, “modestly improving U.S. economic data and a more accommodative tone from the Federal Reserve” are responsible for the stickiness in rates. With a rate cut later this month looking nearly certain, prospective homeowners will receive another shot in the arm.

Our Choices

Last month’s dismal readings for key indicators fail to predict the coming rebound in the housing market. Record low delinquencies and sticky mortgage rates indicate that the current situation is safe and favorable for prospect homeowners. Meanwhile, sellers stand to gain from a strong economy and tight supplies.

This is why it makes sense to invest in stocks set to gain from the coming rebound in housing. However, picking winning stocks may prove to 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.

Quanex Building Products Corporation NX is a provider of components for the fenestration industry.

Quanex carries a Zacks Rank #1 (Strong Buy) and has a VGM Score of A. The company’s expected earnings growth for the current year is 30.8%. The Zacks Consensus Estimate for the current year has improved by 11.8% over the past 60 days.

NVR, Inc. NVR is engaged in the construction and sale of single-family detached homes, townhomes and condominium buildings, all of which are primarily constructed on a pre-sold basis.

NVR carries a Zacks Rank #1 and has a VGM Score of B. The company’s expected earnings growth for the current year is 1.8%.

TopBuild Corp. BLD is an installer and distributor of insulation products to the construction industry.

TopBuild sports a Zacks Rank #1 and has a VGM Score of B. The company’s expected earnings growth for the current year is 21.8%.The Zacks Consensus Estimate for the current year has improved by 2.2% over the past 60 days.

Builders FirstSource, Inc. BLDR is a leading supplier and manufacturer of structural and related building products for residential new construction in the United States.

Builders FirstSource has a VGM Score of B. The Zacks Consensus Estimate for the current year has improved by 0.6% over the past 60 days. The stock sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

KB Home KBH is a well-known homebuilder in the United States and one of the largest in the state of California.

KB Home has a Zacks Rank #2 (Buy) and VGM Score of A. The company’s expected earnings growth for the current year is 57.4%.The Zacks Consensus Estimate for the current year has improved by 2.4% over the past 30 days.

Installed Building Products, Inc. IBP operates as a residential insulation installer.

Installed Building Products has a Zacks Rank #2 and VGM Score of A. The company’s expected earnings growth for the current year is 13.7%.The Zacks Consensus Estimate for the current year has improved by 1.7% over the past 60 days.

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Quanex Building Products Corporation (NX) : Free Stock Analysis Report
 
TopBuild Corp. (BLD) : Free Stock Analysis Report
 
Installed Building Products, Inc. (IBP) : Free Stock Analysis Report
 
Builders FirstSource, Inc. (BLDR) : Free Stock Analysis Report
 
KB Home (KBH) : Free Stock Analysis Report
 
NVR, Inc. (NVR) : Free Stock Analysis Report
 
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