Housing is one of the few markets that displayed stern resilience to the economic impacts of the coronavirus pandemic. This industry has experienced a strong V-shaped recovery and is now even exceeding pre-pandemic levels fueled by rising need for more work-at-home space and record low mortgage rates.
A Sneak Peek Into Recent Housing Data
The National Association of Home Builders or NAHB and Wells Fargo Housing Market Index rose five points to 83 in September – the highest the association has seen since its inception 35 years ago, according to a release from the NAHB on Sep 16. The association's housing market index, which gauges the single-family housing market, marks the fifth consecutive improvement of the index in September. Notably, all HMI indices, including current sales conditions, sales expectations and traffic of prospective buyers, reported their highest readings ever in the month.
Homebuilders are extremely positive on the market prospects given the rising demand and the suburban shift for homebuilding backed by low interest rates.
Meanwhile, existing-home sales jumped 25% to a seasonally adjusted annual pace of 5.86 million units in July, the National Association of Realtors (“NAR’) said in an Aug 21 report. It was the highest sales level since 2006 and the biggest monthly rise on record. The prior record for a monthly gain was the 21% jump seen in June, per the NAR. Notably, the metric for the month of August is slated to be released today.
Also, new home sales rose 13.9% in July from June and a remarkable 36.3% annually, according to the U.S. Census. The metric reading for August is slated to be out on Sep 24.
Suburban Shift for Homebuilding & Low Rates
The increasing trend for working at home owing to the coronavirus outbreak is prompting many families to choose to live in lower cost and density communities. This is evident from the second-quarter NAHB Home Building Geography Index (HBGI). Notably, the HBGI is a quarterly measurement of building conditions across the country. It utilizes county-level information related to single- and multifamily permits to gauge housing construction growth in many urban and rural regions.
During the second quarter of 2020, small metro suburbs reported the fastest growing geographical single-family construction, up 10.6% on a four-quarter moving average basis, according to NAHB. This was followed by small towns (9.3%), small metro core areas (7.5%) and exurbs (5.6%).
Along with a shift toward suburbia, a very low mortgage rate environment has spurred many first-time homebuyers to foray into the real estate market. As reported by mortgage buyer Freddie Mac on Sep 17, the average rate on the 30-year home loan edged up to 2.87% — just one basis point higher than last week. By contrast, the rate averaged 3.73% a year ago. Also, spurred by the low loan rates, first-time home purchases jumped 19% in August from July, to the highest monthly level ever tracked, according to Freddie Mac.
That said, we cannot ignore the potent headwinds that may impede the industry's momentum to some extent. The industry participants are worried about rising costs and delivery delays for building materials, especially lumber. Rising demand for lumber, shortage of supply and 20% tariffs on Canadian supply have been bumping up lumber prices, which in turn are building pressure on homebuilders. NAHB chief economist Robert Dietz pointed out that since mid-April, lumber prices are now up 170% – adding more than $16,000 to the price of a typical new single-family home.
Nevertheless, the housing market has been defying all these odds. The housing industry has gained 151.1% over the past six months, outperforming the broader Construction sector and S&P 500 composite’s 88.1% and 45.6% rally, respectively. Keeping in mind the positive momentum and optimism surrounding growth potential, momentum investing should be a winning strategy for investors seeking higher returns in a short spell.
Homebuilding Stocks That Led the Way
Finding the right stocks to invest in is always a challenge. It is more so when a fear of second wave of the coronavirus pandemic is just around the corner. Nonetheless, we have enough evidence that the economic picture is likely to have improved in the third quarter, mostly due to increased residential construction.
Below, we have picked housing stocks that saw their prices move north fighting all odds stemming from the pandemic over the past six months. We pair a Momentum Score of A or B with a Zacks Rank of #1 (Strong Buy) or 2 (Buy), which as you know indicates stocks with high chances of outperforming the market over the next one-three months. The Momentum Style Score is an indication of the time to buy a stock to benefit from rising share prices. For a more in-depth understanding, check out our Style Score System. You can see the complete list of today’s Zacks #1 Rank stocks here.
But investors should bear in mind that this is a speculative strategy and not meant for the weak-of-heart.
The chart below shows the price performance of our four picks in the past six months.
Lennar Corp. LEN: Based in Miami, FL, Lennar is engaged in homebuilding and financial services in the United States. The Zacks Consensus Estimate for its current-year earnings has improved 12.3% over the past seven days.
Zacks Rank #1
Momentum Score A
Price Performance Over Past 6 Months: Up 161.5%
TRI Pointe Group Inc. TPH: This Irvine, CA-based homebuilder designs, constructs and sells single-family detached and attached homes in the United States. The Zacks Consensus Estimate for its current-year earnings has moved up 29.4% over the past 60 days.
Zacks Rank #1
Momentum Score B
Price Performance Over Past 6 Months: Up 154.4%
M.D.C. Holdings, Inc. MDC: Based in Denver, CO, this company engages in the homebuilding and financial service businesses in the United States. The Zacks Consensus Estimate for its current-year earnings has climbed 1.7% over the past seven days.
Zacks Rank #1
Momentum Score A
Price Performance Over Past 6 Months: Up 128.8%
Toll Brothers Inc. TOL: Based in Horsham, PA, Toll Brothers builds single-family detached and attached home communities; master planned luxury residential resort-style golf communities; and urban low, mid, and high-rise communities, principally on the land it develops and improves. The Zacks Consensus Estimate for its current-year earnings has moved 9.4% north over the past 30 days.
Zacks Rank #2
Momentum Score B
Price Performance Over Past 6 Months: Up 240.8%
These Stocks Are Poised to Soar Past the Pandemic
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