4 Top Stocks to Build a Position in Q2 Housing Recovery

The housing sector had fallen out of favor in the first quarter of 2018 with high prices, rising rents and interest rates doing the damage. However, a rebound is now palpable, with millennials contributing to most of the sector’s gains.

4 Top Stocks to Build a Position in Q2 Housing Recovery

There has been an increasing shift in the population group toward house ownership due to an improving employment scenario and a burgeoning economy.

Moreover, as millennials are likely to comprise around 75% of the workforce by 2025, the housing sector appears as a lucrative long-term bet. The sector’s growth trajectory is also intact for 2018, implying that investing in home-building stocks now would be prudent. Let’s take a look at what’s driving the space.

Millennials Buying More Homes

Gone are the days were millennials, typically bachelors, were stereotyped based on their choice to stay with parents. Now, people from this age group are contributing in a big way to the housing market recovery with a keenness to buy property rather than rent. For the first time in 13 years, 20- and 30-somethings have given a solid impetus to the U.S. housing market.

Per Dario Cardille, vice president of growth marketing at Owners.com, these house hunters have set their priorities straight. They prefer staying closer to work or for that matter a specific neighborhood of choice and therefore look beyond high prices. Moreover, with a rising trend in rents, it becomes cheaper to own. Cardille also estimated that the millennials are expected to go overboard by spending 40% higher than their budget, averaging $24,545 in home buying.

Moreover, analysts stated that the number of homes owned by people aged under 35 years rose to 36% during the fourth quarter of 2017 from 34.7% over the same period last year. This trend is likely to continue in 2018. However, the rate of homeownership is the highest in population aged 65 years or above, which constitutes approximately 79.2% of total ownership.

A tight labor market, lowest-ever levels of unemployment (currently pegged at 4.1%) and the new tax code have actually renewed confidence among millenials. Moreover, per the latest report by ADP, the private sector added an impressive 241,000 new jobs last month.

New Tax Code to Boost the Housing Market

President Trump’s new tax code lowered the value of mortgage interest deduction to $750,000 from $1 million. The bill also capped deductions for state and local taxes, which include property taxes, at $10,000. Moreover, the bill doubled these standardized deductions as a result of which very few homeowners would now be willing to itemize the tax filings.

While such a scenario apparently diminishes the benefits of homeownership, Mark Zandi, chief economist at Moody’s Analytics believes that this would rather weigh on “house-price growth.” He reasoned that certain housing markets rely on taxpayers “who use those tax benefits, which have been capitalized into house prices.” In the absence of these benefits, prices would drastically fall. This automatically gives a boost to home sales.

Freddie Mac Average Commitment Rate

The 30-year average commitment rate was 4.33% in February 2018, up from 4.17% noticed in the year-ago period but well below the high of 18.45% noted in October 1981, as per Freddie Mac. In fact, the rates are moderately higher than the annual average of 2017 (3.99%).

According to the chief economist at Moody’s Analytics, “as long as rates move up to 4.50%, 4.75%, or even 5% because the job market is good and wage growth is improving, it’s no big deal.”

Compelling Earnings Prospects in Q2

During the first quarter of 2018, the Real Estate Select Sector SPDR (XLRE), which represents real estate shares included on the S&P 500, declined 3.3%. However, a recovery seems to be occurring at this point. During March, the Real Estate Select Sector SPDR (XLRE) gained 3% even as the S&P 500 lost 2.7% after major tech stocks suffered heavy losses.

Total Q1 earnings for the S&P 500 index are expected to be up 15.9% from the same period last year on 7.3% higher revenues. This would follow 13.5% earnings growth on 8.5% revenue growth in the preceding period.

For the fourth quarter 2017, real estate sector earnings were up +20.6% from the same period last year on +13.3% higher revenues. For the first quarter 2018, earnings growth is expected to be up +36.3% on +15.9% higher revenues.

4 Great Choices

Increased spending in housing, new tax code, tight labor market and lowest ever levels of unemployment are reasons enough to say that the housing market is poised to gain phenomenally in Q2. Moreover, earnings estimates for the second quarter seem compelling.

Given such positives, it would be wise to invest in these four stocks from the housing sector. However, picking the winning stocks may be difficult.

For this, we have taken the help of the Zacks Stock Screener to make our selection foolproof. Further, these stocks carry a Zacks Rank #1 (Strong Buy) or 2 (Buy) and have compelling one-year returns.

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 #1. The company has an expected earnings growth of 50.1% for the current year. Also, the company has returned 51.5% in a year’s time, outperforming the 27.2% rally of the industry it belongs to.

Beazer Homes USA, Inc. (NYSE:BZH) is among the country’s largest single-family homebuilders with a presence in Arizona, California, Delaware, Florida, Georgia, Indiana, Maryland, Nevada, North Carolina, South Carolina, Tennessee, Texas and Virginia.

Beazer Homes has a Zacks Rank #2. The company has an expected earnings growth of 13.6% for the current year. Also, the company has returned 45.1% in a year, outperforming the industry it belongs to.

Lyon William Homes (NYSE:WLH) is primarily engaged in design, construction, marketing and sale of single-family detached and attached homes in California, Arizona, Nevada and Colorado.

Lyon William has a Zacks Rank #2. The company has an expected earnings growth of 37.8% for the current year. Also, the company has returned 46% in the last 12 months, outperforming the industry.

M.D.C. Holdings, Inc. (NYSE:MDC) is engaged in construction, sale and related financing of residential housing and acquisition and development of land for use in homebuilding activities.

M.D.C. has a Zacks Rank #2. The company has expected earnings growth of 15.6% for the current year. Also, the company has returned 7.8% in the last one year period, underperforming the industry. However, the stock has witnessed 8.1% upward revision in earnings estimates for 2018 over the last 60 days.

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