Builder Confidence Ends 2019 at 20-Year High: 5 Housing Picks

U.S. homebuilder sentiment was strong at the end of 2019. Per the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), confidence level among builders jumped five points to 76 in December from the revised November reading of 71. Notably, the December reading marked the highest level since June 1999.

“Builders are continuing to see the housing rebound that began in the spring, supported by a low supply of existing homes, low mortgage rates and a strong labor market,” NAHB Chairman Greg Ugalde said in a statement.

All the three indices registered gains in December. A gauge of present sales conditions rose seven points to 84 from November. Traffic of prospective buyers also increased four points to 58 and sales predictions for the next six months edged up one point to 79.

The three-month moving averages for regional HMI reading were impressive in all regions other than Northeast. Midwest reported a five-point gain to 63, West increased three points to 84 and South rose one point to 76 from the prior-month figure. However, Northeast fell two points to 61 from a month ago.

Solid Economic Fundamentals Hold Key

The impressive readings are reflective of solid prospects in the U.S. homebuilding sector. Lower mortgage rates, Fed’s dovish stance, solid economic growth and favorable demographics are adding to the industry’s strength. Also, a 50-year low unemployment rate and increased wage growth make the picture rosier.

The U.S. economy grew at 2.1% in third-quarter 2019, exceeding the initial estimate of 1.9%. At the same time, consumer confidence levels remained high, thanks to almost a 50-year low unemployment level, scarce layoffs and steady rise in wages. These will certainly improve consumer outlays as well.

However, the housing market has its share of challenges. Supply-side constraints like labor and land availability continue to put pressure on builders’ margins. Also, higher development costs are hurting affordability and dampening its prospects to some extent.

Nonetheless, improved housing starts data in recent months should continue to favor the industry. Housing starts jumped 3.8% in October from September, which is a positive sign for the overall economy as developers anticipate higher demand. Also, low mortgage rates should continue to stimulate appetite among buyers, keeping sales volume positive in 2020.

5 Top Construction Picks

In view of the aforementioned positives, we have selected five homebuilding companies that investors may choose to bet on. We have chosen the stocks with the help of the Zacks Stock Screener.  These stocks carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Meritage Homes Corporation MTH: This leading national homebuilder primarily engages in the construction and sale of single-family houses in entry-level and move-up markets.

Earnings estimates for 2020 have increased 7.1% in the past 60 days to $6.83 per share. It has three-five year expected earnings growth rate of 9%. The company currently sports a Zacks Rank #1 and has a VGM Score of A.

Our VGM Score identifies stocks that have the most attractive value, growth and momentum characteristics. In fact, our research shows that stocks with a VGM Score of A or B, when combined with a Zacks Rank #1 or 2, make a solid investment choice.

D.R. Horton, Inc. DHI: This leading national homebuilder currently sports a Zacks Rank #1 and has a VGM Score of A. Earnings for 2020 are expected to witness 9.7% growth year over year. It has a long-term expected earnings growth rate of 11.8%.

M/I Homes, Inc. MHO: This leading builder of single-family homes currently sports a Zacks Rank #1. Earnings for 2020 are expected to witness 5.3% growth year over year.

PulteGroup, Inc. PHM: This leading homebuilding and financial services company currently sports a Zacks Rank #1 and has a VGM Score of B. Earnings for 2020 are expected to grow 9.4% year over year. It has a long-term expected earnings growth rate of 8%.

NVR, Inc. NVR: Headquartered in Reston, VA, the company constructs and sells single-family detached homes, townhomes and condominium buildings. It currently carries a Zacks Rank #2 and a VGM Score of B.

Earnings for 2020 have been upwardly revised by 1.1% in the past seven days to $222.52 per share. The company has a three-five year expected earnings growth rate of 10.9%.

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D.R. Horton, Inc. (DHI) : Free Stock Analysis Report
 
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