Homebuilders continue to fly high, buoyed by strong demand. The Monthly Housing Market Index (HMI) reading jumped five points to 55 in June from May, according to the National Association of Home Builders (“NAHB”) report released on Monday. Low existing homes for sale and strong underlying demand for housing, along with refining supply chain efficiency, raise optimism.
This marks the sixth month in a row of confidence increase and also the first time that the index has touched 50 since July 2022 despite headwinds like persistent shortage of skilled labor and tight credit market that continue to vex builders.
The June 2023 reading was, however, down from the year-ago period level of 67. Yet, all three HMI components grew sequentially this month. Current sales conditions increased five points to 61 from May. Buyer traffic rose four points to 37 and sales prediction over the next six months moved north by six points to 62.
Various homebuilding companies have been registering gains from the positive momentum of the industry. Notable among them are M.D.C. Holdings, Inc. (MDC – Free Report) , M/I Homes, Inc. (MHO – Free Report) , PulteGroup (PHM – Free Report) , Toll Brothers, Inc. (TOL – Free Report) and Beazer Homes USA, Inc. (BZH – Free Report) .
Other important positive takeaways from the June survey highlighted that builders are slowly reducing sales incentives. This depicts the mounting optimism in the demand for single-family homes. Although 56% of builders offered incentives to buyers in June, this percentage has dropped since December 2022.
Again, the share of builders reducing home prices to boost sales declined to 25% in June, which was down from 27% in May and 30% in April. Notably, the metric was at its peak level of 36% in November 2022. The average price reduction in June was 7%, indicating a positive change compared to December 2022’s 8%.
Fed’s Hawkish Pause
The Fed’s determination to curtail inflation through interest rate hikes and quantitative tightening had impacted the homebuilding market badly last year, resulting in a slowdown in sales across the country and accelerated mortgage rates. Now, mortgage rates in the United States have dropped for the second straight week. The 30-year fixed mortgage rate was 6.69% for the week ended Jun 15, per Freddie Mac data, down from 6.71% last week. A year ago, the rate averaged 5.78%.
The pullback comes a day after the Fed decided to forgo another hike in its benchmark interest rate, leaving it in a target range of 5%-5.25%.
Homebuilding Industry Performance
Overall, the U.S. housing market seems to be doing well, defying headwinds like low inventory level and a tight loan market.
So far this year, the Zacks Building Products – Home Builders industry has widely outperformed the broader market (S&P 500), as you can see below. The industry falls within the top 7% (17 out of more than 250 industries) of the Zacks Industry Rank, which hints at further growth.
Image Source: Zacks Investment Research
Key Homebuilding Stocks
Adding some homebuilding stocks to your portfolio seems to be a judicious move at this point, given solid demand. With the help of the Zacks Stock Screener, we have zeroed in on five stocks that have a Zacks Rank #1 (Strong Buy) or 2 (Buy) and favorable metrics. A top Zacks Rank indicates that these stocks have been witnessing positive estimate revisions, which generally translate into rapid price appreciation. You can see the complete list of today’s Zacks #1 Rank stocks here.
M.D.C. Holdings: Headquartered in Denver, CO, this company’s homebuilding operations include purchasing finished lots or developing lots for the construction and sale of primarily single-family detached homes to first-time and first-time move-up homebuyers under the Richmond American Homes name. MDC expects an increasing community count to help drive volume in 2023.
MDC — a Zacks Rank #1 stock — has jumped 42.3% year to date. The Zacks Consensus Estimate for its 2023 and 2024 earnings has been upwardly revised by 39.8% and 35.8%, respectively, over the past 60 days. The company’s earnings surpassed the Zacks Consensus Estimate in two of the trailing four quarters and missed on other two occasions, the average surprise being 27.8%. Again, it carries an impressive VGM Score of A. This helps to identify stocks with the most attractive value, growth and momentum.
M/I Homes: Based in Columbus, OH, this is one of the nation’s leading builders of single-family homes. It has been riding high, given its diverse markets and product offerings, and a strong balance sheet.
MHO — a Zacks Rank #1 stock — has jumped 69.7% year to date. MHO has seen an upward estimate revision of 11.5% and 7.6% for 2023 and 2024 earnings, respectively, over the past 60 days. Its earnings topped consensus estimates in all the trailing four quarters, with the average surprise being 30%. It carries an impressive VGM Score of A.
PulteGroup: Based in Atlanta, GA, this homebuilder has been benefiting from a prudent land investment strategy, focus on entry-level buyers and return of more free cash flow to shareholders. PulteGroup’s annual land acquisition strategies have been resulting in improved volumes, revenues and profitability for quite some time now. The company has been reaping benefits from the successful execution of strategic initiatives to boost profitability, with a focus on entry-level homes.
PHM — a Zacks Rank #1 stock — has jumped 61.5% year to date. The Zacks Consensus Estimate for its 2023 and 2024 earnings has been upwardly revised by 23.9% and 26.5%, respectively, over the past 60 days. Its earnings topped consensus estimates in three of the trailing four quarters and missed on one occasion, with the average surprise being 15.6%. Again, it carries an impressive VGM Score of A.
Toll Brothers: Based in Horsham, PA, Toll Brothers is a leading builder of luxury homes. The company has been benefiting from its strategy of broadening its product lines, price points and geographies. Also, it has been gaining from the lack of competition in the luxury new home market, its build-to-order approach and solid backlog level. This, combined with its policy of boosting its supply of spec homes into the spring selling season and focus on operational efficiency, has been helping TOL to drive growth.
TOL — a Zacks Rank #1 stock — has gained 47.3% this year so far. The Zacks Consensus Estimate for its fiscal 2023 and 2024 earnings has been upwardly revised by 22.5% and 29.7%, respectively, over the past 60 days. The company’s earnings surpassed the Zacks Consensus Estimate in all the trailing four quarters, the average being 24.4%. It has an impressive VGM Score of A.
Beazer Homes USA: This Atlanta, GA-based homebuilder designs, constructs, and sells single-family and multi-family homes under the Beazer Homes, Gatherings, and Choice Plans names. An ample supply of lots and a more efficient and less leveraged balance sheet will drive growth.
BZH — a Zacks Rank #1 stock — has gained 74.9% this year. The Zacks Consensus Estimate for its fiscal 2023 and 2024 earnings has been upwardly revised by 11% and 4.2%, respectively, over the past 60 days. The company’s earnings surpassed the Zacks Consensus Estimate in all the trailing four quarters, the average being 25.1%. It carries an impressive VGM Score of A.