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5 Stocks to Buy as Housing Starts Hit 4-Month High

U.S. housing starts turned the corner in June, rebounding from a three month long slump. Ground was broken on new homes at the sharpest annual rate recorded over four months. Surely, Wednesday’s report on housing from the Department of Commerce will a long way toward restoring confidence in a sector that has had more than its fair share of troubles recently.

Fresh questions had risen about the health of the homebuilding industry after a particularly dismal report on homebuilder sentiment was released on Tuesday. But the housing starts report indicates that demand on the buyer side remains high at a time when homebuilder stocks are surging. Picking up homebuilding stocks continues to remain a lucrative option at this time.

June Rebound Ends 3-Month Decline

According to the Department of Commerce, housing starts increased by 8.3% from May to a seasonally adjusted rate of 1.22 million in June. This represents a 2.1% annual increase, the highest recorded in four months. June’s housing starts were also considerably higher than the estimated level of 1.16 million. The increase experienced last month comes after three straight monthly declines. Additionally, May’s housing starts figure of 1.09 million, originally the lowest recorded in eight months, was revised upward to 1.12 million.

Building permits also increased, by 7.4%, to a seasonally adjusted annual pace of 1.25 million. The forward looking metric also experienced a year-over-year increase of 5.1%, implying that housing activity is likely to remain strong in the near future. Meanwhile, single family starts increased by 6.3%, indicating that homebuilding companies were prioritizing homes built for sale over those intended for rentals.

Construction of multifamily homes, which includes apartment buildings and townhouses, increased by 13.3%. This substantial increase represents a strong rebound after five consecutive months of declines. Additionally, housing starts experienced increases over three of the four geographical regions surveyed. This includes a 22% jump in the Midwest. Meanwhile, housing completions increased by 5.2% to the highest level witnessed since Nov 2016.

Is Falling Homebuilder Confidence Really a Worry?

The bullish housing starts report is particularly significant since it comes immediately after a substantial decline in homebuilder sentiment. In July, homebuilder sentiment declined from 67 to 64, its lowest level in eight months. The immediate trigger for the decline is the rising cost of construction materials, following the imposition of a steep tariff on Canadian lumber. Initially, homebuilders were hopeful that President Trump would deliver on promises to curtail regulations. However, the index remains well above 50, which means that improvement in the sector continues, but at a slower pace.

But the industry is less hopeful of action on the policy front, since Trump’s promises continue to remain unfulfilled. Instead, homebuilders are depending on steady demand from buyers, borne out by the latest data on groundbreaking for homes. A strong labor market and a soft interest rate regime have ensured consistent gains for homebuilder stocks. For instance, LGI Homes, Inc. LGIH and D.R. Horton, Inc. DHI have gained 48.3% and 34.1% year to date. The SPDR S&P Homebuilders XHB has increased by 15% over the same period.

Our Choices

A strong housing starts report has gone a long way in restoring investors’ confidence in the homebuilding sector. Steady buyer demand and a soft interest rate regime are the factors which continue to power the sector.

Adding homebuilding stocks to your portfolio looks like a prudent option at this point in time. We have narrowed down our search to the following stocks based on a good Zacks Rank and other relevant metrics.

KB Home KBH is a well-known homebuilder in the United States and one of the largest in the state of California.

KB Home has expected earnings growth of 51.7% for the current year. Its earnings estimate for the current year has improved by 5.8% over the last 30 days. The stock has gained 48.2% year to date. The stock has a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Lennar Corporation LEN is engaged in homebuilding and financial services in the U.S.

Lennar has a Zacks Rank #2 (Buy) and its projected growth for the current year is 10.2%. Its earnings estimate for the current year has improved by 1.2% over the last 30 days. The stock has gained 24.2% year to date.

M.D.C. Holdings, Inc. MDC is engaged in the construction, sale and related financing of residential housing and the acquisition and development of land for use in its homebuilding activities and sale to others in the Denver, Phoenix, Maryland, Virginia, mid Atlantic region, Las Vegas, Dallas and California metropolitan areas.

M.D.C. Holdings has a Zacks Rank #2 and its projected growth for the current year is 27.9%. Its earnings estimate for the current year has improved by 0.7% over the last 30 days. The stock has gained 40.5% year to date.

Taylor Morrison Home Corporation TMHC is a homebuilder and land developer engaged in building single-family detached and attached homes for first-time buyers, move-up families to luxury and active adult customers.

Taylor Morrison has a Zacks Rank #2 and its projected growth for the current year is 12.1%. Its earnings estimate for the current year has improved by 0.3% over the last 30 days. The stock has gained 25.9% year to date.

TRI Pointe Group, Inc. TPH is involved in the design, construction and sale of single-family homes.

TRI Pointe Group has a Zacks Rank #2 and its projected growth for the current year is 5.6%. Its earnings estimate for the current year has improved by 1.3% over the last 30 days. The stock has gained 21% year to date.

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