New Home Sales Strongest Since 2006: Top 7 Housing Stocks

Sales of new single-family homes exceeded 1 million in August 2020, marking the highest level since September 2006. The metric, which has been rising for four consecutive months, exceeded analysts’ expectation by 13.6%.

The U.S. housing market has shown a resilient performance over the past few months despite ambivalent market predictions and fears of a second wave of the virus. Not only did the industry offset these COVID-19-related headwinds but also tackled lumber price swings, mortgage delinquencies, U.S.-China trade spat, labor shortage and inflating land prices.

This industry has experienced a strong V-shaped recovery since May and its growth is now exceeding pre-pandemic levels fueled by the work-from-home initiative and record low mortgage rates.

Since May, the Zacks Building Products – Home Builders industry has improved 57.1% compared with the Zacks Construction sector and S&P 500 composite’s 35% and 14.6% rally, respectively.

Inside the Numbers

August new home sales increased 4.8% to a seasonally adjusted annual rate of 1,011,000 from an upwardly-revised July rate of 965,000 units. Also, the sales pace was 43.2% higher than the year-ago period.

Regionally, the metric rose in Northeast and South (accounting for bulk of transactions) by 5% and 13.4%, respectively. Sales in the Midwest and West, however, dropped 21.4% and 1.7%, respectively, in August. Nonetheless, sales in all the four regions increased in double digits from the August 2019 level.

Median sales price in August was $312,800, which fell 4.6% month over month and 4.3% from the year-ago level. Average sales price of $369,000 also declined 0.8% from the prior month and 6% from August 2019.

August housing inventory decreased 3.1% from July and 13.2% from the year-ago period to 282,000. It would take just 3.3 months to deplete the current supply of homes, down from 3.6 months in July and 5.5 months in the comparable period last year.

Other Encouraging Housing Data

Apart from solid new home sales, August existing home sales also marked the highest reading since 2006, up 10.2% year over year. Housing starts also improved 2.8% in August from the previous year.

The above-mentioned strong readings show how homebuilding has been gaining strength in recent times. The trend is likely to continue on account of record-high September U.S. homebuilders’ sentiment. The National Association of Home Builders or NAHB and Wells Fargo Housing Market Index rose five points to 83 in September — the highest reading since its inception 35 years ago. Homebuilders are extremely positive about the market prospects, given rising demand and a suburban shift for homebuilding backed by low interest rates.

In fact, gradual improvement in the labor market is also adding to the bliss. Per the U.S. Bureau of Labor Statistics report, August unemployment rate declined 1.8 percentage points to 8.4% from 10.2% reported in July. Importantly, the metric was significantly better than the market prediction of 9.8%, as companies are rehiring furloughed employees post coronavirus-induced lockdowns.

Will This V-Shaped Recovery Continue?

Although these favourable data promotes huge confidence in the industry, investors are still worried about the persisting headwinds. The industry participants are also worried about rising costs and delivery delays for building materials, especially lumber. Rising demand for lumber, shortage of supply and 20% tariffs on Canadian supply have been bumping up lumber prices, which in turn are building pressure on homebuilders.

According to the latest Producer Price Index report released by the Bureau of Labor Statistics, material costs increased 0.9% in August from July, marking its fourth consecutive monthly increase. In fact, lumber prices have elevated almost 50% since April.

Being impacted by rising lumber prices and shortage of inventory, builders are now increasing prices of homes. According to the latest Federal Housing Finance Agency data, the Home Price Index rose at a seasonally adjusted annual rate of 6.5% in July from the year-ago period, following a 5.7% increase in June and 4.9% in May.

Nevertheless, the housing market has been defying all these odds. The increasing trend for working at home post COVID-19-led shutdown is prompting many families to live in lower-cost and low-density communities. Also, a low mortgage rate environment has spurred many first-time homebuyers to foray into the real estate market.

Per a Freddie Mac report released on Sep 24, the average rate on the 30-year home loan edged up to 2.9%, just three basis points higher than last week. Encouragingly, mortgage applications rose 6.8% for the week ended Sep 18 from the week earlier, according to the Mortgage Bankers Association or MBA’s Weekly Mortgage Applications Survey. Joel Kan, MBA’s associate vice president of economic and industry forecasting, said, “Despite the uptick in rates, refinance applications increased around 9% and were almost 86% higher than last year.”

Stocks to Bet on

Backed by solid housing metrics and forgoing cost woes, we have listed five top-ranked stocks from the homebuilding industry and two stocks from Zacks Retail – Home Furnishings industry that investors must add to their portfolio. Notably, these stocks have been picked with the help of the Zacks Stock Screener and carry a Zacks Rank #1 (Strong Buy) or #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Seven such housing stocks with encouraging performance and prospects are RH RH, Meritage Homes Corporation MTH, Lennar Corporation LEN, M.D.C. Holdings, Inc. MDC, D.R. Horton, Inc. DHI, and Williams-Sonoma, Inc. WSM.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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