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5 Homebuilder Stocks to Buy as New Home Sales Rebound

Swarup Gupta

In June, new home sales staged a strong rebound after two straight months of decline. However, sales for the three preceding months were revised downward. Additionally, the metric came in below expectations, leading to speculation that housing recovery had stalled once again.

However, enough evidence to the contrary is already available. For one, homebuilder sentiment ticked upward this month, boosted the level of supply of existing homes. More importantly, mortgage rates continue to plumb lower depths, raising the affordability of homes for prospective buyers.

If there is weakness in the housing market, it is largely temporary in nature. New home sales have increased over the first half of the current year, primarily due to the fall in real mortgage interest rates. Adding homebuilder stocks to your portfolio would make for a smart choice.  

New Home Sales Recover in June

New home sales increased 7% to clock a seasonally adjusted annual rate of 646,000 units in June. In doing so, the metric came in below the estimated level of 656,000. However, it still represents a recovery from two straight months of decline and an improvement from May’s level of 604,000.

At the same time, the figure for May has been revised downward from the earlier estimate of 626,000 units. Data for March and April were also revised lower. However, June’s new home sales registered a year-over-year increase of 4.5%. Some analysts have of course also emphasized the volatile nature of the metric.

Homebuilder Sentiment Trends Higher

In July, the National Association of Home Builders/Wells Fargo Housing Market Index inched up by 1 point to hit 65. Naysayers were quick to point out that the reading is well below the July 2018 level of 68. But any level above 50 denotes an expansion, in this case firm demand for single family homes.

A new report from has stated that the supply of home for sales has slipped and inventories could hit a fresh low in October. However, this was not apparent from the new home sales data.

Even if only the current pace of sales is maintained, 6.3 months would elapse before supplies are exhausted. This is marginally higher than the level of 6 months which is considered the hallmark of a balanced housing market. 

Strong Labor Market, Low Rates to Fuel Home Buying

Going forward, the health of the housing market, as indeed of the entire economy, depends on the strength of the labor market. This in turn will likely fuel consumers’ confidence upward, resulting in higher sales. However, Josh Shapiro, chief economist at MFR Inc believes that “the current level of starts of single family homes is supported by final demand.”

And any weakness in the market is likely only temporary. Overall, the housing market has been on the mend since the beginning of the year. This is primarily attributable to the decline in real mortgage interest rates.

Americans have purchased around 54,000 new single-family homes since January. This represents a 2% improvement from the first half of 2018. As of now, this promises to be the best year for new home sales since 2007.

Our Choices

The solid rebound in new homes sales indicates that the housing recovery continues to chug along. Any weakness in the housing market is only temporary and sales are likely to be driven higher over the rest of the year by falling real mortgage rates. A strong labor market is also contributing to robust sentiment.

Investing in homebuilder stocks still looks prudent. However, picking winning stocks may prove to be difficult.

This is where our VGM Score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM Score. 

We have narrowed down our search to the following stocks based on a good Zacks Rank and VGM Score.

M.D.C. Holdings, Inc. MDC engages in the homebuilding and financial services businesses in the United States.

M.D.C. Holdings has a VGM Score of B. The Zacks Consensus Estimate for the current year has improved by 7.9% over the past 30 days. The stock sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

NVR, Inc. NVR is engaged in the construction and sale of single-family detached homes, townhomes and condominium buildings.

NVR has a Zacks Rank #2 (Buy) and VGM Score of A. The company’s expected earnings growth for the current year is 6%.The Zacks Consensus Estimate for the current year has improved by 4.1% over the past 30 days.

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 a Zacks Rank #2 and VGM Score of A. The company’s expected earnings growth for the current year is 56.7%.The Zacks Consensus Estimate for the current year has improved by 2% over the past 30 days.

M/I Homes, Inc. MHO is one of the leading builders of single family homes in the United States.

M/I Homes has a Zacks Rank #2 and VGM Score of B. The company’s expected earnings growth for the current year is 5.7%.

Beazer Homes USA, Inc. BZH designs, builds and sells single family homes.

Beazer Homes has a Zacks Rank #2 and VGM Score of B. The Zacks Consensus Estimate for the current year has improved by 12% over the past 30 days.

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