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US Housing Space Holds Strong Prospects: 5 Top Picks

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Sreoshi Bera
·6 min read
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The U.S. housing market has emerged as a bright spot over the past months even as the pandemic ravaged the economy. Sales of new and existing houses have hit record highs as migration from congested cities to low-populated suburbs has increased. Meanwhile, headwinds like rise in construction costs and surge in new coronavirus cases have dampened builders’ confidence in January. However, low mortgage rate, steady demand for new homes and Biden’s first-time homebuilder tax credit are few factors that will eventually boost the housing space in the upcoming months.

Currently, home builders have been concerned about the surge in lumber and other material costs, lack of affordable lots and labor shortage that is leading to delay in delivery time and is bumping up home prices. The NAHB and Wells Fargo Housing Market Index have declined by three points in January to 83 from 86 in December. However, the supply side constraints will eventually subside as coronavirus cases drop. In fact, vaccine providers like Moderna and Pfizer have already bumped up production and the government expects to obtain herd immunity in American by summer.

Rise in lumber price eventually pushes up construction costs, however, the demand for new homes will in due course help homebuilders earn enough to bear the cost. Here are factors that indicate that demand for housing market will remain strong in the upcoming months.

Housing Starts Rose to Best Since Late 2006

On Jan 21, the Commerce Department reported that U.S. housing starts jumped 5.8% to a seasonally adjusted annual rate of 1.669 million units in December, surpassing the consensus estimate of 1.562 million and crossing November’s revised figure of 1.578. December’s figure is the best since late 2016 as homebuilders responded to robust demand for single-family homes. The mass departure from cities to suburbs and other low-density areas has been a driving demand. Companies continue to allow employees to work from home and schools have shifted to online classes because of the pandemic.

Mortgage Rates Remain Below 3%

The Federal Reserve slashed interest rate near zero (0.00–0.25%) to counter the impact of pandemic-led closures and economic turbulence. Though the Fed’s interest rates do not directly impact mortgage rates, lower rates lead to decreased adjustable-rate mortgage payments. This in turn helps homebuyers to opt for financing when theinterest rate is low. With Fed planning to keep rates unchanged,a further drop in mortgage rates is expected. So far the 30-year fixed mortgage rate has stuck below 3% and this historically-low borrowing cost has boosted sales.

According to mortgage company Freddie Mac’s report, the 30-year fixed mortgage rate for the week ending Jan 21 averaged 2.77%.

Biden’s First-Time Homebuilder Tax Credit

The 46th President Joe Biden has several plans to lift the economy out of this pandemic slump. One of them is sure to benefit the housing space. New home sales have been steady since the middle of 2020, however, rise in home prices due to shortage of supply has made it difficult for many homebuyers to make payments. If passed, Biden’s $15,000 first-time homebuilder tax credit facility will make homes more affordable for Americans and keep the housing market booming. This credit facility could be accessed immediately by buyers (who haven’t bought a home in at least three years) and act as down-payment assistance.

Biden plans to focus on urging big banks for Federal Housing Administration (FHA) lending, encouraging construction of both new single- and multifamily homes and affordability. From home financing to home construction, Biden plans to resolve issues like lofty prices and shortage.

5 Stocks to Buy

Given the current scenario, the housing market is expected to continue its rebound this year, hence we have shortlisted five stocks that can return well.

KB Home KBH builds and sells various homes that include attached and detached single-family residential homes, townhomes, and condominiums. The company's expected earnings growth rate for the current year is 63.3% compared with the Zacks Building Products - Home Builders industry’s projected earnings growth of 14.7%.

The Zacks Consensus Estimate for the company’s current-year earnings has been revised 19.7% upward over the past 60 days. KB Homeholds a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Lennar Corporation LEN engages in homebuilding operations that include the construction and sale of single-family attached and detached homes. This company that belongs to the Zacks Building Products - Home Builders industry has an expected earnings growth rate of 8.3% in the current year.The Zacks Consensus Estimate for this Zacks Rank #1company’s current-year earnings has been revised 7.6% upward over the past 60 days.

Quanex Building Products Corporation NX offers flexible insulating glass spacers, extruded vinyl profiles, window and door screens, and precision-formed metal and wood products. The company's expected earnings growth rate for the current year is 11.3% compared with the Zacks Building Products - Miscellaneous industry’s projected earnings growth of 0.4%.The Zacks Consensus Estimate for the company’s current-year earnings has been revised 26.6% upward over the past 60 days. Quanex Building Products holds a Zacks Rank #1.

Watsco, Inc. WSO distributes air conditioning, heating, and refrigeration equipmentand related parts and supplies. This  Zacks Rank #2 (Buy) company's expected earnings growth rate for the current year is 6.9% compared with the Zacks Building Products - Air Conditioner and Heating industry’s projected earnings growth of 0.5%.The Zacks Consensus Estimate for the company’s current-year earnings has been revised 1.4% upward over the past 60 days.

Installed Building Products, Inc. IBP engages in the installation of insulation, waterproofing, fire-stopping, fireproofing, garage doors, rain gutters, window blinds, shower doors, closet shelving and mirrors, and other products. The company's expected earnings growth rate for the current year is 31.3% compared with the Zacks Building Products - Miscellaneous industry’s projected earnings growth of 0.5%.The Zacks Consensus Estimate for the company’s current-year earnings has been revised 5.6% upward over the past 60 days. Installed Building Products holds a Zacks Rank #2.

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Watsco, Inc. (WSO) : Free Stock Analysis Report
 
KB Home (KBH) : Free Stock Analysis Report
 
Lennar Corporation (LEN) : Free Stock Analysis Report
 
Quanex Building Products Corporation (NX) : Free Stock Analysis Report
 
Installed Building Products, Inc. (IBP) : Free Stock Analysis Report
 
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