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4 Housing Stocks to Buy as Existing Home Sales Picks Up Pace

Ankita Gupta

Sales of previously owned homes increased in July, despite shortage of lower-priced homes. After declining for the last five consecutive months, the metric increased on declining mortgage rates, which improved affordability, and strong labor market. Also, it outpaced the consensus estimate by 0.7%.

Despite headwinds arising from a global economic slowdown, the overall U.S. housing industry looks good, supported by the Federal Reserve’s dovish stance. While low mortgage/interest rates are helping prospective buyers, shortage of low-priced homes is pushing up prices, making it difficult for them to get involved in more transactions.

Let’s delve deeper into the numbers to get a clearer picture of the announcement.

Encouraging Home Sales Data

Per the National Association of Realtors’ (“NAR”), sales of existing homes, accounting for more than 90% of total U.S. home sales, grew 2.5% from the previous month to a seasonally adjusted annual rate of 5.42 million units in July. Also, the metric rose 0.6% from 5.39 million reported in July 2018. Notably, it was the first year-over-year increase in the last 17 months and the second highest level in 2019.



Post the news release, the exchange-traded funds or ETFs that track the homebuilding industry witnessed an upside. The SPDR S&P Homebuilders ETF increased 1.5%, iShares U.S. Home Construction ETF gained 1.4% and Invesco Dynamic Building & Const ETF was also up 1%.

Also, homebuilders such as Hovnanian Enterprises HOV, Century Communities, Beazer Homes USA BZH and Lennar LEN gained 18.5%, 2.6%, 2.1% and 1.2%, respectively. Sales of previously owned homes recorded growth across the Midwest, South and West regions in July, with the exception of Northeast. In fact, the West witnessed a significant rise.

Sales in the West region jumped 8.3% from the prior month but were down 0.8% from year-ago period. Sales in the Northeast, which account for the majority of existing home sales, fell 2.9% from June and 4.3% year over year.

Median existing-home price in the month rose 4.3% to $280,800 from the comparable year-ago period, marking the 89th straight month of year-over-year increase.

Inventory slipped in the month, leaving lesser number of homes for future sales. Total housing available for sale decreased 1.6% from both June 2019 and July 2018 level. Unsold inventory is at a 4.2-month supply level, at the current sales pace, which is down from 4.4 months in June and 4.3 months a year ago.

In the words of NAR’s chief economist Lawrence Yun, “Home buying is a serious long-term decision and current low or even lower future mortgage rates may not in themselves meaningfully boost sales unless accompanied by improved consumer confidence.”

First-time buyers accounted for 32% of sales in July, down from 35% reported in the prior month and in line with a year ago. Moreover, NAR revealed that the annual share of first-time buyers in 2018 was 33%.

A Look at Recent Mortgage Rates

According to the latest Freddie Mac Primary Mortgage Market Survey, mortgage rates remained flat for the week ending Aug 15 from a week ago and declined 93 points from a year ago. Notably, the average U.S. rate for a 30-year fixed mortgage was lowest since November 2016. Also, mortgage demand reached a three-year high in the said week. Declining mortgage rates allowed refinance activity to exceed past records.

As revealed by Mortgage Bankers Association's (MBA) Weekly Mortgage Applications Survey for the week ending Aug 16, Refinance Index grew 0.4% from the previous week and a notable 180% from the year-ago period, reaching the highest level since July 2016.

Along with lower mortgage rates, the recent cut in interest rates by Fed to stimulate growth in economic activities is a boon for the housing industry.

Lower interest rates will reduce the cost of borrowing for consumers, thereby aiding buyers to have greater access to funds. Notable homebuilders are optimistic as they have been reporting firm demand for single-family homes. However, they continue to struggle with rising construction costs stemming from excessive regulations, persistent shortage of workers and lack of buildable lots.

4 Must-Buy Housing Stocks

There are plenty of reasons to be optimistic about the broader housing sector over both the short and the long term. However, picking winning stocks may be difficult.

With the help of the Zacks Stock Screener, we have zeroed in on four stocks that have a Zacks Rank #1 (Strong Buy) or 2 (Buy) and a VGM Score of A or B. A top Zacks Rank indicates that these stocks have been witnessing positive estimate revisions, which generally translates into rapid price appreciation.

Our VGM Score identifies stocks that have the most attractive value, growth and momentum characteristics. In fact, our research shows that stocks with a VGM Score of A or B, when combined with a Zacks Rank #1 or 2, are solid bets. You can see the complete list of today’s Zacks #1 Rank stocks here.

Meritage Homes MTH, which designs and builds single-family homes in the United States, sports a Zacks Rank #1 and has a VGM Score A. The Zacks Consensus Estimate for its current-year earnings has increased 10.5% over the past 30 days. The company's expected three-five-year earnings growth is 8.2%.

Taylor Morrison Home TMHC, a public homebuilder in the United States, currently sports a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has increased 4.5% over the past 30 days. Moreover, the company currently has a VGM Score of A.

M/I Homes MHO operates as a builder of single-family homes in the United States. The company currently sports a Zacks Rank #1 and has a VGM Score A. The Zacks Consensus Estimate for its current-year earnings has increased 9% over the past 30 days.

D.R. Horton DHI primarily engages in the homebuilding business in the United States. The company currently carries a Zacks Rank #2 and has a VGM Score A. The Zacks Consensus Estimate for its current-year earnings has increased 6.6% over the past 30 days. The company is expected to see earnings growth of 11% over the next three to five years.

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