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US Housing is Booming in 2020: Here's How to Trade It

Last month’s home sales, including existing and new homes, were 10.8% higher than the same period a year ago. In fact, sales of previously-owned homes rose 3.6% last December compared with November to reach a seasonally adjusted annual rate of 5.54 million despite the shortage of supply of properties for sale, per the National Association of Realtors.

Home sales picked up in the second half of last year, providing fresh momentum heading into 2020, especially with the economy growing at a healthy pace and borrowing rates remaining attractive. The pace of U.S. economic expansion accelerated in the third quarter of 2019. Per the Bureau of Economic Analysis, the economy grew at an annualized rate of 2.1% in the three months ended Sep 30, versus the initial estimate of 1.9% and 2% in the second quarter. The unemployment rate, by the way, is at its lowest level in half-a-century.

Meanwhile, the average interest rate on a 30-year fixed mortgage now is around 3.6%, down from 4.45% a year ago, according to Freddie Mac. It’s worth pointing out that the Fed’s interest rate cuts for three times last year have dragged mortgage rates down from the year earlier.

Across the board, U.S. homebuilding activity hit a 13-year high last month. Housing starts climbed 16.9% on a seasonally adjusted annual rate to 1.608 million units, the highest since December 2006. And it’s way beyond analysts’ expectations of an increase of 1.375 million units in December. Residential investments, by the way, rebounded in the third quarter of 2019 after contracting for six straight quarters, the longest since the 2007-09 recession.

Notably, millennials are anticipated to propel the housing market this year. Most of these individuals will turn 30 next year and consider buying their first home. In fact, millennials are expected to take half of all mortgages next year, surpassing both Generation X and Baby Boomers, per realtor.com.

The report states that demand for especially entry-level homes will pick up, thanks to millennials driving overall demand. And buyers will certainly benefit from almost flat home prices, which are predicted to increase only 0.8%. The report added that home prices may even decline in cities such as Dallas, Las Vegas, Miami, Chicago and San Francisco.

Skeptics, in the meantime, may argue that the U.S. housing market will face tough times in 2020, the same way it did in 2005. However, unlike 2005, the risks of speculation have gone down, and questionable mortgages like no-documentation loans aren’t taking place this time around. Thus, it can be safely said that probability of a housing crash this year is limited. Quite the reverse, the iShares U.S. Home Construction ETF (ITB), which predominantly tracks homebuilding stocks, hit a 13-year high last week. So far this year, ITB has increased more than 6% compared with the S&P 500’s rise of around 3%. Over the past 12-month period, the ITB is up 47.3%, while the S&P 500 is up 21.7%.

5 Solid Buys

Given the aforesaid positives, investing in housing-related stocks that can make the most of the improved homebuilder sentiment this year seems judicious. We have, thus, selected five such stocks that carry a Zacks Rank #1 (Strong Buy) or 2 (Buy).

M/I Homes, Inc. MHO operates as a builder of single-family homes in Ohio, Indiana, Illinois, Minnesota, Maryland, Virginia, North Carolina, Florida and Texas. The company currently has a Zacks Rank #1. The Zacks Consensus Estimate for its next-quarter earnings has moved up 15.5% over the past 60 days. The company, which is part of the Building Products - Home Builders industry, is expected to see earnings growth of 27.3% in the current quarter and year. You can see the complete list of today’s Zacks #1 Rank stocks here.

KB Home KBH operates as a homebuilding company in the United States. It operates in four segments: West Coast, Southwest, Central, and Southeast. The company currently has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has climbed 4.6% over the past 60 days. The company, which is part of the Building Products - Home Builders industry, is expected to see earnings growth of 38.7% and 27% in the current quarter and year, respectively.

M.D.C. Holdings, Inc. MDC engages in homebuilding businesses in the United States. It is engaged in the construction, sale and related financing of residential housing. The company currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has moved up 0.3% over the past 60 days. The company, which is part of the Building Products - Home Builders industry, is expected to see earnings growth of 22.8% and 21.9% in the current and next quarter, respectively.

RH RH operates as a retailer in home furnishings. It offers products in various categories, including furniture, lighting, textiles, bathware, décor, outdoor and garden, tableware, and child and teen furnishings. The company currently has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has increased 6.7% over the past 60 days. The company, which is part of the Retail - Home Furnishings industry, is expected to see earnings growth of 19.3% and 35.4% in the current quarter and year, respectively.

Tempur Sealy International, Inc. TPX develops, manufactures, markets, and distributes bedding products. The company currently has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has moved up 0.5% over the past 60 days. The company, which is part of the Retail - Home Furnishings industry, is expected to see earnings growth of 32.2% and 28.7% in the current quarter and year, respectively.

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See Zacks' 3 Best Stocks to Play This Trend >>

Click to get this free report KB Home (KBH) : Free Stock Analysis Report M.D.C. Holdings, Inc. (MDC) : Free Stock Analysis Report M/I Homes, Inc. (MHO) : Free Stock Analysis Report Tempur Sealy International, Inc. (TPX) : Free Stock Analysis Report RH (RH) : Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research