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November New-Home Sales Hit 8-Month High: 5 Hot Picks

Shrabana Mukherjee

The month of November brought some relief for the U.S. housing market as sales of new single-family homes hit the highest level in eight months, reversing the gloom over the previous few months. Moreover, October's number was revised upward.

Sales of newly constructed single-family homes, accounting for roughly 10% of all U.S. home sales, soared16.9% in November from the prior month to a seasonally adjusted annual rate of 657,000 units, per data released on Jan 31 by the Commerce Department. The November figure was well above the consensus forecast of 569,000. Additionally, median sales prices in November fell 7% to $302,400, the lowest since February 2017. Average prices also fell 8.4% to $362,400.

Homebuilding stocks gained strongly yesterday after the news release, with shares of notable homebuilders KB Home KBH, Beazer Homes USA, Inc. BZH, Toll Brothers TOL, D.R. Horton DHI, Lennar LEN and PulteGroup, Inc. PHM gaining 4.3%, 4.1%, 3.4%, 2.3%, 2.2% and 2.1%, respectively. Also, iShares U.S. Home Construction ETF ITB, which tracks the homebuilding industry, rose 2.4%, after the news release.

The upsurge in new home sales came as sales in the Northeast doubled to a rate of 46,000, while sales in the Midwest and South surged 30.5% and 20.6%, respectively. New home sales, however, dropped 5.9% in the West.

Despite the noteworthy monthly increase, the Commerce Department stated that new home sales in November were still down 7.7% from the year-ago period.

A Look at This Week’s Mortgage Rates

The 30-year, fixed-rate mortgage averaged 4.46% for the week ended Jan 31, 2019, according to mortgage finance agency Freddie Mac. That was up just one basis point from the prior week and the first time in 2019 when mortgage rates crawled up.

Homebuyers looking to refinance showed their sensitivity to loan pricing as rates edged up. Mortgage applications continued to pull back this week, according to the latest data from the Mortgage Bankers Association. The market composite index — a measure of total loan application volume — dropped 3% from a week earlier. The refinance index declined 6% from the prior week, while the purchase index slipped 2%.The refinance share of mortgage activity accounted for 42% of all applications.

Mortgage rates have trended lower since fall, spurring home sales in the final months of 2018. Still, rates are higher compared with the year-ago period, which might have played a role in the dip in last week’s purchase applications.

Freddie Mac’s chief economist Sam Khater remains hopeful and believes “softening house price appreciation along with increasing inventory of homes on the market – and historically low mortgage rates – should give a boost to the spring homebuying season.”

Fed’s Dovish Tone: A Boon

Following this week’s two-day policy meeting, the U.S. Federal Reserve has decided to leave interest rates unchanged at 2.25-2.5%. Fed chair, Jerome Powell, said that the U.S. Central bank will be “patient” before implementing more interest rate increases. Such adjustments would take into account global financial and economic conditions and “muted inflation pressures.” This is a sharp contrast to a much more hawkish Fed in December and certainly a boon for the rate-sensitive housing market.

It’s a common manifestation that when statements from Fed catch markets in confusion, bond yields fell given its inclination to pause future rate hikes. Mortgage rates are sure to move in this direction. This is expected to be factored into Freddie Mac’s survey in the coming weeks.

Added to this much-needed housing tailwind is a low unemployment rate that is adding to the optimism. December unemployment rate of 3.9% was 2 points below the December 2017 level.

Lower Input Costs

Higher construction costs have been compressing margins of many homebuilding companies. Nonetheless, per the Associated Builders and Contractors analysis of U.S. Bureau of Labor Statistics data released on Jan 15, 2019, the construction input prices declined 1.7% in the month of December from November. Notably, nonresidential construction prices also fell 1.6% month over month.

Although rising interest rates, raw material and home prices have been weighing on builders’ sentiments for the past several quarters, the current data helping investors in regaining their lost confidence to some extent.

This positive momentum that the housing industry is currently experiencing can be validated by its share price performance. The Zacks Building Products - Home Builders industry has outperformed the broader S&P 500 in the past three months. The industry has collectively gained 10.1% compared with the S&P 500 index’s 0.3% decline.

5 Hot Picks

Given the aforementioned positives in the housing industry, we have selected a few stocks that investors can rely on for good returns. Our chosen five are backed by the Zacks Stock Screener and flaunt a Zacks Rank #1 (Strong Buy) and 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Comfort Systems USA, Inc. FIX, a mechanical installation, renovation, maintenance, repair and replacement service provider for the mechanical services industry in the United States, sports a Zacks Rank #1 and belongs to a top-ranked Zacks industry (top 11%). It has a three-five year expected earnings growth rate of 10%.

RH RH, a leading luxury retailer in the home furnishing space, also sports a Zacks Rank #1. The company’s earnings for the current year are expected to grow 175.3%. The Zacks Consensus Estimate for fiscal 2019 has improved 10.1% over the last 60 days.

Lennox International Inc. LII, a provider of climate control solutions on an international scale, carries a Zacks Rank #2. The company has expected earnings growth of 31.2% for 2019. The Zacks Consensus Estimate for 2019 has improved 5.6% over the last 60 days.

Kirkland's, Inc. KIRK, a specialty retailer of home décor, carries a Zacks Rank #2. The Zacks Consensus Estimate for the first quarter of fiscal 2019 has improved by 4.7% over the last 60 days. The company has expected earnings growth of 9% for fiscal 2019.

Loma Negra Compañía Industrial Argentina Sociedad Anónima LOMA manufactures and markets cement and its by-products. It carries a Zacks Rank #2 and has seen the Zacks Consensus Estimate for 2019 earnings increasing 1.4% over the last 60 days. The company’s earnings for 2019 are expected to grow 18.6%.

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