Housing starts made a comeback in May 2018, after falling 3.7% in April, reaching the highest level since 2007. However, housing permits fell further in May, following a decline of 1.8% in April.
Per the latest jointly-released report from the U.S. Census Bureau and the U.S. Department of Housing and Urban Development, housing starts increased 5% to 1.35 million units (seasonally adjusted annual rate) in May from the previous month. The figure also improved 20.3% on a year-over-year basis.
What Led to the Surge in Starts?
Single-family and multi-family starts surged in May. Single-family homes starts, which are of higher importance, rose 3.9% from the prior month and improved 18.3% year over year. Multi-family starts increased 11.3% from the prior month and rose 27.4% from the prior year.
Specifically, a 62.2% rise in new residential construction activity in Midwest boosted overall housing starts. However, construction slumped in the Northeast, South and West regions.
What Does the Drop in Permits Signify?
Residential building permits, an indicator of upcoming construction activity, dropped 4.6% in May to an annualized rate of 1.3 million units from April. Single-family home permits dipped 2.2% and the same for construction of multi-family homes declined 8.5%. This signifies that construction activity can mellow down in the upcoming months to some extent.
Nevertheless, on a year-over-year basis, permits rose 8% with single-family homes increasing 7.7% and multi-family homes increasing 9.1%.
Housing Industry’s Current Position
Recently, a rise in interest rate last week dented investors’ optimism in the housing space. The rise in interest rates came at a time when home prices are increasing, thanks to supply constraints and increased raw materials costs. Builders are unnerved by higher aluminum and steel costs due to the newly-imposed tariffs. This along with increased lumber prices from an import tariff is denting builders’ margins, compelling them to hike prices. Further, troubles like labor shortage, limited land availability and apprehension of two more hikes in 2018 along with three in 2019 continue to make things difficult.
Evidently, homebuilder sentiment slid in June from the previous month, to the lowest level this year and below its six-month average of 70. According to Associated Builders and Contractors, construction material prices increased 2.2% in May from the prior month, representing the largest monthly increase since May 2008. On a year-over-year basis, the price of construction materials rose 8.8%.
Should You Buy Housing Stocks Now?
Though myriad problems have been denting the homebuilding industry of late, evident from the 18.8% year-to-date decline against a 3.5% rise of the broader index, the larger picture is convincingly strong.
Consumer demand is robust considering the solid economic scenario, backed by low unemployment and solid wage growth. The solid economic growth is expected to continue with Federal Reserve expecting economic growth of 2.8% for 2018, highlighting an increase of 0.1 percentage point from the estimates issued in March 2018. Fed also expects the rate of unemployment rate at 3.6% in 2018, down from the previous expectation of 3.8%.
Top Choices from Top Industries
As the solid momentum is expected to continue in the rest of 2018, investors can bet on these stocks from the broader construction sector. Apart from homebuilding, we bring stocks from other building product industries as well. An increase in home construction will invariably lead to higher demand for building products.
We have narrowed down our search to the following stocks based on a solid Zacks Rank #1 (Strong Buy) or 2 (Buy) along with strong earnings growth prospects. You can see the complete list of today’s Zacks #1 Rank stocks here.
Weyerhaeuser carries a Zacks Rank #2. The Zacks Consensus Estimate for current-year earnings has been revised 10.3% upward for 2018 and 9.4% for 2019 over the last 60 days. The Zacks Consensus Estimate EPS growth is at 30.4% for the current year.
Trex Company carries a Zacks Rank #2. The Zacks Consensus Estimate for current-year earnings has been revised up 8 cents for 2018 and 6 cents for 2019 over the last 60 days. The Zacks Consensus Estimate for EPS growth is pegged at 35.4% for the current year.
Patrick Industries sports a Zacks Rank #1. The Zacks Consensus Estimate for current-year earnings has moved up 4.9% for 2018 and 5.8% for 2019 over the last 60 days. The Zacks Consensus Estimate for EPS growth is pegged at 41.8% for the current year.
Installed Building Products sports a Zacks Rank #1. The company has been witnessing upward estimate revisions — 4.3% for 2018 and 7% for 2019 — in the last 60 days. The Zacks Consensus Estimate for EPS growth is pegged at 42.9% for 2018 and 25% for 2019.
NCI Building Systems holds a Zacks Rank #2. The company has been witnessing upward estimate revisions — 5.4% for fiscal 2018 and 1.2% for fiscal 2019 — in the last 60 days. The Zacks Consensus Estimate for EPS growth is pegged at 71.2% for fiscal 2018 and 26.5% for fiscal 2019.
M.D.C. Holdings flaunts a Zacks Rank #1 and a Value Score of A. The Zacks Consensus Estimate for current-year earnings has been revised up 15.1% upward for 2018 and 11% for 2019 over the last 60 days. The Zacks Consensus Estimate for EPS growth is projected at 33.3% for the current year.
Meritage Homes Corporation is a Zacks Rank #2 stock. Earnings estimates for 2018 and 2019 have moved up 9.3% and 1.7%, respectively, over the past 60 days. The Zacks Consensus Estimate projects EPS growth at 42.5% for the current year.
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