Housing starts hit their highest level in more than a year in January after the sector recovered following a decline in December due to poor weather. Further, building permits, which is a reliable indicator of future demand, also increased appreciably. Overall, the monthly new residential construction report indicates that the sector is in fine fettle and likely has a strong year ahead.
Continuing economic expansion, strong jobs market and wages growth are likely to ensure gains for the sector in the months to come. This is why it makes good sense to invest in select homebuilding stocks at this point.
Multi-family Starts Surge
In January, housing starts increased 9.7% to a seasonally adjusted annual rate of 1.33 million units. This is the highest level recorded since October 2016 and the second highest since the end of the Great Recession. The figure was also 7.3% higher than the January 2017 pace of 1.24 million and exceeded the estimated level of 1.23 million units by a wide margin.
Single family housing starts increased by 3.7% to 877,000 after declining by 10.6% to 846,000 in December. More notably, multi-family housing starts jumped by 23.7% to 449,000 units. Building permits, a reliable indicator of future activity, increased by 7.4% to a 1.4 million pace, the highest on record since June 2007. Permits for multi-family homes surged 26.5% over the same period.
Can Tight Supplies Spoil the Party?
For some time now, tight supplies have threatened to derail the housing recovery. In December 2017, existing home sales came in at 5.57 million units, below most estimates, primarily due to a preexisting shortage in inventories. The resultant increase in housing prices and a spike in mortgage prices are the major impediments for the housing sector in the current year.
Fortunately, homebuilders have responded by continuously stepping up the construction of single family homes. This is a clear indication that they continue to have confidence in the economy, since such homes are usually bought, not rented. Multi-family homes have also shown an increase, with a discernable shift toward luxury apartments.
Moreover, a report released last week by the National Association of Home Builders indicated that homebuilder confidence has maintained at an appreciably high level during February. According to the report, the NAHB/Wells Fargo Housing Market Index remained unchanged at 72, broadly in line with most analyst estimates. The figure is also near the highest level since 1999, indicating that a strong year lies ahead for the sector.
The recent spike in housing starts bolsters the view that 2018 is likely to be a strong year for the housing sector. Also, homebuilders have responded to the problem of tight supplies by stepping up the construction of single-family homes. This is likely to address the supply-demand mismatch in the near future.
Adding homebuilder stocks to your portfolio looks like a smart option at this point. We have narrowed down our search to the following stocks based on a good Zacks Rank and other relevant metrics.
Century Communities, Inc (NYSE:CCS) is a home building and construction company. The company operates in major metropolitan markets in Colorado, Texas, Houston, Utah, Atlanta and Nevada.
Century Communities has expected earnings growth of more than 100% for the current year. The Zacks Consensus Estimate for the current year has improved 2.8% over the last 30 days. The stock has a Zacks Rank #1 (Strong Buy).
D.R. Horton Inc (NYSE: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 a Zacks Rank #2 (Buy). The company has expected earnings growth of 58.8% for the current year. The Zacks Consensus Estimate for the current year has improved 7.2% over the last 30 days.
KB Home (NYSE:KBH) is a well-known homebuilder in the United States and one of the largest in the state of California.
KB Home has a Zacks Rank #2. The company has expected earnings growth of more than 100% for the current year. The Zacks Consensus Estimate for the current year has improved more than 3.6% over the last 30 days.
NVR, Inc. (NYSE:NVR) is engaged in the construction and sale of single-family detached homes, townhomes and condominium buildings.
NVR has a Zacks Rank #2. The company has expected earnings growth of 33.3% for the current year. The Zacks Consensus Estimate for the current year has improved 2.7% over the last 30 days.
Toll Brothers Inc (NYSE:TOL) builds single-family detached and attached home communities; master planned luxury residential resort-style golf communities; and urban low, mid, and high-rise communities principally on the land it develops and improves.
Toll Brothers has a Zacks Rank #2. The company has expected earnings growth of 28.7% for the current year. The Zacks Consensus Estimate for the current year has improved 4.6% over the last 30 days.
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