Last month, U.S. housing starts soared to its highest level in 13 years. A major driver of this rise was the Federal Reserve’s three rate cuts last year that in turn lowered mortgage rates. This should continue to boost borrowings this year, and bode well for homebuilders and other housing-related stocks.
New-Home Construction Surges in December
On Jan 17, the Commerce Department reported that construction of new homes grew by 16.9% at an annual rate of 1.608 million in December, beating the consensus estimate of 1.374 million. The figure is a 13-year high and 40.8% more than the December 2018 rate of 1.142 million and 2.6% above the November’s revised figure of 1.375 million.
In fact, low mortgage rates, a 50-year low unemployment rate and robust American consumers have helped the housing space to boom. Major cities in the United States like Raleigh, Nashville, Charlotte, Denver and Austin experienced stronger inbound moves compared to the previous year due to lower housing costs and increased job opportunities.
Single-family home construction increased by 11.2%, hitting its highest level since 2007 and rose substantially in the Midwest and South. While multifamily homes like condos and complexes jumped 29.8%, the highest since 1986.
Low Mortgage Rates: A Prime Driver
The U.S. housing market regained momentum in 2019 and residential investment rebounded in the third quarter after contracting for six straight quarters. The push primarily came from Fed’s three consecutive interest rates cuts from July to September. This rate cut has also helped mortgage rates to fall, helping consumers to borrow more easily.
According to mortgage finance agency Freddie Mac, the 30-year fixed mortgage rate has dropped to an average of 3.65% from November 2018’s peak of 4.94%. In fact, mortgage applications went up more than 30% in December and refinance applications increased 109% year over year in 2019.
Nevertheless, Fed’s decision to keep interest rates unchanged throughout 2020 should keep the momentum alive in the housing industry.
Given the solid growth in U.S. housing starts and low mortgage rates, it is ,most likely that the construction and home building space will keep growing. Hence, we have shortlisted five stocks that carry a Zacks Rank #1 (Strong Buy) or 2 (Buy) and are poised to return well on investments.
KB Home KBH is a homebuilding company that builds and sells single-family residential homes, townhomes and condominiums primarily for first-time, first move-up and active adult homebuyers. KB Home stands out from its competitors as they allow buyers to personalize their homes from homesites and floor plans to design features. Their commuter-friendly locations offer a distinguished collection of affordably priced one- and two-story floor plans and have were recently launched in Valri Park and Tampa, FL.
The company’s expected earnings growth rate for the current year is 27% compared with the Zacks Building Products - Home Builders industry’s projected earnings growth of 2.6%. The Zacks Consensus Estimate for this Zacks Rank #1 company’s current-year earnings has been revised 4.6% upward over the past 60 days. You can see the complete list of today’s Zacks #1 Rank stocks here.
Arcosa, Inc. ACA manufactures and sells infrastructure-related products and services for the construction, energy and transportation markets. The company closed the acquisition of Cherry Industries, Inc. earlier this month. The acquisition will help Arcosa to gain a new complementary product line of recycled aggregates and boost infrastructure spending primarily in Texas.
This Zacks Rank #1 company’s expected earnings growth rate for the current year is 25.3% compared with the Zacks Building Products - Miscellaneous industry’s projected earnings growth of 3.8%. The Zacks Consensus Estimate for the company’s current-year earnings has been revised 0.9% upward over the past 60 days.
Forterra, Inc. FRTA is a Zacks Rank #1 company that manufactures and sells pipe and precast products. The company offers concrete drainage pipes used for storm water applications, residential and non-residential site developments, sanitary sewers, low-pressure sewer force mains, tunneled systems, treatment plant piping, and utility tunnels.
The company’s expected earnings growth rate for the current year is 77.3% compared with the Zacks Building Products - Concrete and Aggregates industry’s projected earnings growth of 4.4%. The Zacks Consensus Estimate for the company’s current-year earnings has been revised 76.2% upward over the past 90 days.
Installed Building Products, Inc. IBP engages in the installation of insulation, waterproofing, fire-stopping, fireproofing, garage doors, rain gutters, window blinds, shower doors, closet shelving and mirrors, and other products. During mid-2019, the company diversified its portfolio with made four minor tuck-in acquisitions that were merged into existing operations. Moreover, its geographic expansion in core residential insulation end market will help it grow further in 2020.
The company’s expected earnings growth rate for the current year is nearly 21% compared with the Zacks Building Products - Miscellaneous industry’s projected earnings growth of 3.8%. The Zacks Consensus Estimate for the company’s current-year earnings has been revised 0.3% upward over the past 60 days. Installed Building Products flaunts a Zacks Rank #1.
Eagle Materials Inc. EXP engages in the manufacture and sale of recycled paperboard for the gypsum wallboard industry and other paperboard converters and other heavy construction materials. The company is poised to benefit from the boom in the Desulphurization Gypsum market due to rising research and development and increasing investments.
The company’s expected earnings growth rate for the current year is 6.1% compared with the Zacks Building Products - Concrete and Aggregates industry’s projected earnings growth of 4.4%. The Zacks Consensus Estimate for the company’s current-year earnings has been revised 0.9% upward over the past 60 days. Eagle Materials carries a Zacks Rank #2.
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