Despite the latest report showing an easing of inflation, home prices continue to rise due to a lack of supply and high interest rates. Price increases have accelerated since February after a brief slowdown late last year.
With two Fed rate cuts expected by December, mortgage rates should decrease. This may bring more buyers to the market, making now a good time to consider which stocks to buy.
Fannie Mae’s survey found 81% of prospective buyers think now is a bad time to buy a house. The housing market index has steadily improved over two years, suggesting conditions may support increased demand driving prices. Although the market should stabilize by year-end, prices are forecast to rise above inflation.
In the latest CoreLogic report, home prices rose 5.3% annually and will likely continue rising, though the increase rate may ease later this year. High prices have reduced buyer demand, however, demand is improving. The rise in housing demand could benefit certain companies, offering investment opportunities.
Real estate investment trusts (REITs) provide less risky exposure to market trends. Home building materials suppliers and home builders are well-positioned to capitalize on surging home prices. Therefore, three stocks that may benefit are:
CoStar Group (CSGP)
CoStar Group (NASDAQ:CSGP) provides data and analytics services to hospitality and real estate firms through services such as CoStar Market Analytics and CoStar Property.
While the company does not sell property directly, it could benefit substantially from an increase in transaction fees if the housing market improves. Higher home prices imply higher commissions, making CSGP one of the stocks to buy.
Despite challenges in the overall real estate market, the company grew sales 12% over the last 12 months. Following improved first-quarter performance, management increased full-year guidance.
With real estate market pressures, the CSGP stock price has declined this year, down 13% as expected. However, the company invested over $100 million in marketing over the last year, negatively impacting profits. This should now help generate returns.
Analysts unanimously recommend buying CSGP stock, giving it an average price target 37% above the current price. Higher interest rates are anticipated to ease in the second half of the year, aiding the investment thesis.
Toll Brothers (TOL)
Toll Brothers (NYSE:TOL) is the second pick of stocks to buy on this list. The homebuilding company not only designs and constructs homes but also arranges financing.
Toll Brothers divided its operations into traditional home building, targeting suburbs, and city living, which unsurprisingly targets urban areas with apartment complexes. It also serves second-home buyers.
The firm has the highest average selling price of homes, so it could benefit more from a decompression of the housing industry, with lower mortgage rates allowing buyers to opt for more expensive homes.
The company has been holding back on paying dividends to its shareholders to conserve capital, reduce debt and build inventory in anticipation of growing sales. It says it sees strong demand and raised its guidance with its last earnings release.
TOL stock exchanges hands at a +20% so far this year, yet it still offers a very cheap buy-in. It trades at a price-to-earnings (P/E) ratio of 8.4x, which compares low to the average of the real estate sector of 34.8x.
CRH (CRH)
The Dublin-based building materials company CRH (NYSE:CRH) produces and supplies concrete, aggregates, precast modules and asphalt products. These materials are commonly used for new home developments, roads, driveways and building foundations.
Notably, CRH generates over 64% of its revenue from U.S. operations. It recently completed a $2.1 billion acquisition in the U.S. while still increasing its dividend by 5%.
Analysts have a generally positive view of CRH stock, with a median price target of 23.1% upside potential. This is despite trading 15% higher in 2024, which makes CHR a solid pick in this list of stocks to buy. Notably, Morgan Stanley (NYSE:MS) recently upgraded its rating from equal-weight to overweight.
The company also fits the definition of a value stock, trading at a P/E ratio of 17.5x while offering a dividend yield of 2.6%. This dividend yield bodes well with its 5-year average.
Last year, EPS grew 22%, and the company forecasts similar growth for 2024. Growth estimates are at 24.90%, which is five-fold above the estimates for the S&P 500.
On the date of publication, Stavros Tousios 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.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
