The U.S. housing market continues to show strength at this point in 2021, and that continues to bode well for housing stocks on Wall Street.
The most recent report from the U.S. Department of Housing and Urban Development showed that building permits issued for new home construction in November of this year were stronger than expected and 3.6% ahead of the number of building permits issued in October. The demand for newer and larger homes that began with the onset of the novel coronavirus pandemic in March 2020 has largely continued unabated despite several headwinds. This includes factors like the inflation that has driven the cost of lumber and other building materials higher, a national labor shortage and global supply constraints that have made getting needed materials more difficult.
Fueled by continued low interest rates (for now at least), demand has kept the housing boom going. So much so that the SPDR S&P Homebuilders ETF (NYSEARCA:XHB), which includes all the major U.S. homebuilders, suppliers and retailers, is up 44% this year at nearly $83 per share.
So, with the housing boom likely to continue into the New Year, these three stocks to buy represent the sector in a strong way.
Now, let’s dive in and take a closer look at each one.
Housing Stocks to Buy: Lennar (LEN)
Fontainebleau, Florida-based Lennar Corp. is the largest home construction company in the U.S., and is seen by many analysts as a bellwether for the entire housing market. With operations in 23 states, Lennar’s stock price is closely tied with the performance of the national housing market. And, judging by the performance of LEN stock, the market has been very good in 2021.
As we close out 2021, Lennar’s share price is up 47% on the year at $112.35. In the last six months, the company’s stock has climbed 14% higher even as looming interest rate hikes threaten to cool the American housing market.
LEN stock recently took a hit, falling 8%, after the company reported financial results that underwhelmed analysts. Owing to a labor shortage and supply constraints, Lennar reported that it earned $3.91 per share for its most recent quarter ended on Nov. 30. While Lennar’s earnings per share (EPS) was up nearly 40% from the year-earlier quarter, it was below the consensus expectation of Wall Street. In fact, analysts were looking for EPS of $4.15 per share for the quarter.
Additionally, the company’s revenues rose 24% to $8.4 billion in its latest quarterly report, helped by continued growth in home prices. However, the revenue figure too came in below forecasts for $8.51 billion.
However, despite the current challenges to its business, LEN stock remains a safe long-term bet. The median price target on the stock is currently $130 per share, which would be 16% higher than its current level.
Home Depot (HD)
Home Depot is much more than a place for consumers to buy nails and screws. The Atlanta, Georgia-based retailer is also a major outlet for contractors and construction companies, selling them everything from lumber to drywall. And part of the reason why HD stock has gained 160% since the start of the pandemic is because of strong demand from professionals and companies involved in the housing market.
At its current price of $395.64 per share, Home Depot’s stock is up 49% in 2021 alone. More specifically, shares have been on a steady march upward since early March and continue to have momentum heading into the New Year.
Furthermore, Home Depot solidly beat analyst expectations in this year’s third quarter largely on the strength of purchases from contractors and construction companies. The company reported that big-ticket transactions (defined as purchases $1,000 or more) rose 18% year-over-year during Q3. Most big-ticket sales come from professional contractors and companies involved in construction. The strong growth in this segment shows that Home Depot remains the destination of choice for professionals involved in homebuilding.
This fact, combined with the better-than-expected earnings, are the reasons why HD stock continues to outperform the broader market.
Housing Stocks to Buy: Redfin (RDFN)
Perhaps less familiar to most investors is Redfin, a full-service real estate brokerage based in Seattle, Washington. Redfin undercuts other real estate agencies by charging a discounted fee of either 1% or 1.5% of the list price of a seller’s home.
Moreover, Redfin also offers homebuyers a portion of its commission back in what the company calls the “Redfin Refund,” which can be applied to closing costs or paid out in a check after the house purchase is complete. Redfin can afford to do all this because it operates largely online and keeps its overhead costs extremely low. This approach to facilitating housing transactions between buyers and sellers is proving to be popular with consumers.
Because of its popularity, Redfin has been reporting blockbuster earnings results throughout 2021. Most recently, the company announced that its revenue for the third quarter came in at $540 million, up 128% from a year earlier. Meanwhile, its gross profit rose 37% to $127 million from the same period of 2020. Most of the growth came from the “RedfinNow” iBuying segment, which grew revenue by 1,000% in the quarter from a year ago. (iBuying enables homeowners to sell their home without hiring a real estate agent).
However, despite the strong financials, RDFN stock has struggled — down 42% on the year at $39.86 per share. And more recently, shares have declined more than 7% in the past month.
Much of the weakness has come from reports that online real estate competitor Zillow (NASDAQ:ZG) is selling its iBuying segment. Moving forward, RDFN stock should bounce back. The median price target on the shares is currently $60, which would be more than 50% higher than where the stock sits as of this writing.
On the date of publication, Joel Baglole 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.
Joel Baglole has been a business journalist for 20 years. He spent five years as a staff reporter at The Wall Street Journal, and has also written for The Washington Post and Toronto Star newspapers, as well as financial websites such as The Motley Fool and Investopedia.