The U.S. housing market is booming and will continue progressing at a brisk pace on low mortgage rates. According to the FRED economic data, the 30-Year fixed-rate mortgage averaged 2.9% in the past month. It has averaged below 3% since the start of the year, leading to a strong run-up in housing stocks.
The domestic housing market was an unlikely beneficiary from the novel coronavirus pandemic. Since the onset of the virus, housing demand has been on the rise, as people have been hunting for larger homes as a result of the work-from-home trend.
However, supply chain disruptions and record-high raw material prices ailed construction and homebuilding industries.
Of late, though, home sales have been on the rise, defying the impact of the Delta variant and low inventory levels. The Fed’s dovish stance and the desire for a more spacious work-from-home setup will continue to boost the housing market in the near term.
The top housing stocks discussed below are likely to cash in on these trends and grow their businesses.
Housing Stocks to Buy: Meritage Homes Corp (MTH)
Meritage Homes designs and builds single-family attached and detached homes across the United States. It has been a top performer in the homebuilding sector and is valued cheaply based on its incredible growth trajectory and stellar fundamentals.
MTH stock trades at less than one times forward sales, despite industry-beating revenue and EBITDA growth rates.
Meritage had a spectacular second quarter, marked by an 85% increase in net earnings due to record-high home closing revenues in excess of $1.2 billion. Moreover, gross margins expanded by a considerable margin to 27.3% because of stronger average selling prices (ASPs) and operating leverage.
Looking ahead, management estimates home closing revenues could average at $5 to $5.25 billion for the full year. This implies an average double-digit year-over-year growth.
The company will also be moving ahead with its community growth plan, having invested $551 million in the second quarter. Despite these massive investments, it still has $684 million in cash, putting it in a great place to expand its production capacity.
NVR, Inc. is arguably the top homebuilder in the country, which has outperformed its peers through its asset-light business model.
It has established a robust moat with a superior competitive advantage in the industry. The company’s effective land and capital management have enabled it to grow profitably in even the most testing economic times while boosting its financial flexibility in the process.
From a fundamentals perspective, the company has been killing it of late. It’s coming off its third successive quarter with double-digit revenue growth.
It boasts a cash balance of $2.60 billion with total debt of just $1.6 billion. NVR stock has been generating above-average returns with a favorable risk/reward profile for several years now.
KB Home (KBH)
KB Home is one of the most recognizable homebuilders in the U.S., operating in 45 cities across eight states.
The company has been performing remarkably well due to the ongoing housing strength and the need for greater supply in the sector. Hence, it is likely that KBH will deliver strong earnings growth in the next couple of years along with high free cash flows to reduce debt.
In the third quarter, revenues surged to $1.47 billion, representing a 47.1% increase compared to the prior year. Its GAAP EPS of $1.60 came in just a cent below expectations, which is negligible. Moreover, its net order value rose by 22% to $2.01 billion, taking its backlog to $4.8 billion.
Additionally, KB expects to have 260 communities by the conclusion of next year, pointing to a further increase in new orders. It is currently building 9,000 homes, of which 93% have already been sold. Hence, KBH stock is in an incredible position to blast off in the coming quarters.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines
Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.