The U.S. housing market has been booming since the end of 2019, boosted by low mortgage rates due to the Federal Reserve’s three consecutive interest rate cuts and high disposable income of American households. Additionally, millennials and Gen Z are anticipated to propel the housing market throughout 2020.
Millennials: The Largest Group of Home Buyers
The housing sector in the United States is undergoing a revolution of sorts, thanks to concerted efforts by millennials to buy homes across the country. The National Association of Realtors reported that the largest generational cohort, viz., the millennials made up about 37% of all buyers in 2018.
Millennials, who are on the threshold of turning 30, are considering buying homes. Per a realtor.com report, millennials are expected to take half of all mortgages in 2020, leaving behind both Generation X and Baby Boomers. This will surely increase demand for entry-level homes.
What gives millennials an edge over baby boomers is that they are looking for affordable, family-friendly places to stay, rather than suitable weather conditions, lower taxes and lower cost of living to enjoy life after retirement.
Gen Z Catching up Fast
Per Caliber Home Loans reports, Gen Z represented 2.4% of home-buying customers in 2019, compared with 1% in 2018.
These young adults are looking to buy homes with a median price of $160,000, according to Realtor.com. Such buying activity is concentrated in the Southern and Midwestern parts of the United States. In fact, unlike millennials, they have not been through the Great Financial Crisis of 2008. Hence, they are more open to take risks and are willing to take up home ownership than spending a huge amount on rent.
Low Mortgage Rates Drive Growth
During the second half of 2019, the Federal Reserve made three consecutive interest rate cuts, which helped the U.S. housing market to boom. With Fed’s decision to hold rates steady throughout 2020, the housing industry will see an uptrend as consumers look to make the most of the low mortgage rates.
What’s more? An increase in demand is evident due to lower mortgage rate as construction of new homes grew 16.9% at an annual rate of 1.608 million in December. The figure is higher than the consensus estimate of 1.374 million. In fact, the figure marks a 13-year high and is 40.8% above the December 2018 figure of 1.142 million.
Similarly, on the supply side, sales of previously owned homes rose 3.6% in December from November 2019 to an annual rate of 5.54 million, according to the National Association of Realtors data released on Jan 22.
For the week ending Feb 13, Freddie Mac stated that the average for a 30-year fixed-rate home loan stands at 3.47%. The rates are still significantly lower than the previous year. Additionally, the 15-year fixed-rate mortgage dropped to 2.97% for the first time since 2016 and is lower than 3.81% for the same period a year ago.
5 Top Picks
Given the low mortgage rates and millennials and Gen Z’s home buying spree, investors can make the most by investing in home builders and related companies. We have shortlisted five such stocks that sport a Zacks Rank #1 (Strong Buy) or #2 (Buy) and are poised to grow.
M.D.C. Holdings, Inc. MDC engages in homebuilding and financial service businesses. Its financial services operations comprise originating mortgage loans, primarily for homebuyers. The company’s expected earnings growth rate for the current year is 17.2% compared with the Zacks Building Products - Home Builders industry’s projected earnings growth of 6.5%.
The Zacks Consensus Estimate for the company’s current-year earnings has been revised 3.6% upward over the past 60 days. M.D.C. Holdings sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
PulteGroup, Inc. PHM engages in the homebuilding business. The company acquires and develops land primarily for residential purposes, including single-family detached, townhouses, condominiums, and duplexes. The company’s expected earnings growth rate for the current year is 17.2% compared with the Zacks Building Products - Home Builders industry’s projected earnings growth of 6.5%.
The Zacks Consensus Estimate for the company’s current-year earnings has been revised 5.4% upward over the past 60 days. PulteGroup sports a Zacks Rank #1.
Louisiana-Pacific Corporation LPX manufactures building products, primarily for use in new home construction, repair and remodeling, and outdoor structure markets. The company’s expected earnings growth rate for the next year is more than 100% compared with the Zacks Building Products - Wood industry’s projected earnings growth of 9.3%.
The Zacks Consensus Estimate for the company’s current-year earnings has been revised 7.4% upward over the past 60 days. Louisiana-Pacific carries a Zacks Rank #2.
Century Communities, Inc. CCS engages in the design, development, construction, marketing, and sale of single-family attached and detached homes. The company’s expected earnings growth rate for the current year is 11.1% compared with the Zacks Building Products - Home Builders industry’s projected earnings growth of 6.5%.
The Zacks Consensus Estimate for the company’s current-year earnings has been revised 5.1% upward over the past 60 days. Century Communities carries a Zacks Rank #2.
D.R. Horton, Inc. DHI researches, designs, develops, manufactures, implements, markets, and sells energy management systems. The company also provides an array of smart building control systems, which provide lighting control options and data intelligence capabilities for building managers. Orion Energy Systems’ expected earnings growth rate for the current quarter is 23.1% against the Zacks Building Products - Home Builders industry’s projected earnings decline of 6.5%.
The Zacks Consensus Estimate for the company’s current-year earnings has been revised 7.8% upward over the past 60 days. D.R. Horton carries a Zacks Rank #2.
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