Data released last week showed that housing starts declined over the month of January while homebuilders’ confidence slipped this month. Though these reports may seem to be bad tidings at first glance, closer inspection reveals that the housing recovery remains on track. This is borne out by the substantial increase in the forward looking indicator, building permits.
Meanwhile, a bunch of reports released over February clearly show that single family housing has become the primary growth catalyst for the homebuilding sector. Such a trend is likely to continue later this year, what with mortgage rates still at appreciably low levels and demand outstripping supply. In such a situation, selecting homebuilding stocks with strong fundamentals makes for a wise investment option.
Building Permits Surge, Homebuilder Confidence Remains High
In January, housing starts declined by 2.6% to a seasonally adjusted annual rate of 1,246,000. However, this reading was higher than the consensus estimate of 1,225,000. Additionally, it represents a 10.5% increase from Jan 2016’s reading of 1,128,000. More importantly, December’s figure was upwardly revised from the initial estimate of 1,226,000 to 1,279,000.
Moreover, building permits increased 4.6% to a seasonally adjusted annual rate of 1,285,000, significantly higher than the consensus estimate of 1,217,000. This was the highest level witnessed since Nov 2015. This substantial increase for the forward looking indicator implies that the sector is likely to experience better times in the months ahead.
The latest reading of the National Association of Home Builders (NAHB)/Wells Fargo builder sentiment index seems to confirm such a view. Despite the fact that the index declined by 2 points to touch 65 for the month of February, it remains well above the key level of 50. Any level above 50 indicates that builders’ views about sale conditions continue to remain optimistic. In fact, this is the 32nd consecutive month when a level of 50 has been observed.
Single-Family Starts Rise Appreciably
The decline in January’s housing starts numbers was primarily due to a fall in the construction of multi-family projects. The multi-family housing segment category experienced a decline of 7.9% to a seasonally adjusted rate of 421,000. In contrast, starts for single-family units increased by 1.9% to a seasonally adjusted rate of 823,000.
According to Wells Fargo’s Economics Group, the extent of the decline in housing starts was more or less in keeping with expectations. Meanwhile, the volatile multi-family category was possibly entering a quiet period, the group said. This is in line with the NAHB’s prediction that homebuilding growth will be fueled by single family housing this year.
In fact, for the single-family 55+ category, builder confidence remains firm. This optimism is being driven by an aging baby boomer population and the new found confidence provided by presidential election results. The NAHB’s 55+ Housing Market index closed 4Q16 at a level of 67. This represents an eight point improvement over the third quarter and is the highest ever reading registered since the index was started in 2008.
Homebuilder Picks Vs Sector Performance (1 Year)
Our Choices for Homebuilder Stocks to Buy
Despite last month’s dip in housing starts and the decline in homebuilder confidence observed this month, growth for the housing sector remains steady. Single family starts increased last month and is expected to drive growth for the sector in the year ahead.
Picking stocks of homebuilders engaged in the construction of single-family units makes for a smart option now. We have narrowed down our search to the following stocks based on a good Zacks Rank and other relevant metrics.
NVR, Inc. (NVR) is involved in the construction and sale of single-family detached homes, townhomes and condominium buildings.
NVR, Inc. has a Zacks Rank #1 (Strong Buy). Its expected earnings growth for the current year is 23.6%. Its earnings estimate for the current year has improved by 5.5% over the last 30 days. The stock has returned 21.9% over the last one year, outperforming the Zacks Building Products – Home Builders sector, which has gained 21.6% over the same period.
PulteGroup, Inc. (PHM) engages in the homebuilding and financial services businesses primarily in the U.S. The Homebuilding segment offers a wide variety of home designs including single family detached, townhouses, condominiums and duplexes.
PulteGroup has expected earnings growth of 30.1% for the current year. Its earnings estimate for the current year has improved by 9.6% over the last 30 days. The stock has returned 25.6% over the last one year, outperforming the Zacks Building Products – Home Builders sector, which has gained 21.6% over the same period. The stock has a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
William Lyon Homes (WLH) is primarily engaged in the design, construction, marketing and sale of single-family detached and attached homes in California, Arizona, Nevada, Colorado and Washington.
William Lyon has a Zacks Rank #2 (Buy). The company has expected earnings growth of 34.4% for the current year. The forward price-to-earnings (P/E) ratio for the current financial year (F1) is 8.30, lower than the industry average of 9.85. The stock has returned 95.3% over the last one year, outperforming the Zacks Building Products – Home Builders sector, which has gained 21.6% over the same period.
D.R. Horton, Inc. (DHI) is one of the leading national homebuilders, primarily engaged in the construction and sale of single-family houses both in the entry-level and move-up markets.
D.R. Horton has gained 18.4% over the last one year, underperforming the Zacks Building Products – Home Builders Market sector, which has gained 21.6% over the same period. However, it has a Zacks Rank 2.The company has expected earnings growth of 15.6% for the current year. Its earnings estimate for the current year has improved by 2.6% over the last 30 days. This provides a good opportunity to buy the stock which remains valued below its market potential at this point.
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