U.S. homebuilders’ sentiment ended 2021 on a strong note. Homebuilders have been optimistic over the last four quarters as they are witnessing solid demand despite ongoing supply-side bottlenecks. Builder sentiment for single-family homes jumped for the fourth consecutive month at 2020-end and attained the highest reading in February 2021.

Despite the usually slower season for housing, continued supply, labor, and material woes, and new COVID variants, homebuilders are are increasingly confident. Solid demand trends for homes and limited homes have benefited  companies like Toll Brothers, Inc. (TOL Quick QuoteTOL - Free Report) , Meritage Homes Corporation (MTH Quick QuoteMTH - Free Report) , Tri Pointe Homes, Inc. (TPH Quick QuoteTPH - Free Report) , Beazer Homes USA, Inc. (BZH Quick QuoteBZH - Free Report) and Lennar Corporation (LEN Quick QuoteLEN - Free Report) .

U.S. Builder Confidence Strongest in December

The NAHB/Wells Fargo Housing Market Index (HMI) reading unveiled that sentiment among U.S. homebuilders for newly-built single-family homes rose one point to 84 this month from November’s reading of 83. Yet, the metric is still six points below the November 2020 record high reading of 90. Nonetheless, the reading of more than 80 is still encouraging.

Image Source: NAHB

The indicator that gauges present sales conditions rose one point to 90 from the last month. Prospective buyer traffic also improved one point to 70. Sales predictions for the next six months, which gives an idea of future industry movement, remained steady at 84.

Regionally, the three-month moving averages for the HMI reading gained across the regions served.

How 2022 is Poised for Homebuilding Industry?

Yesterday, the Federal Reserve or Fed updated its outlook and projections to further tighten the monetary policy to combat elevated levels of inflation. Although it did not announce any change in the federal funds target rate, it expects three 25 basis point rate hikes in 2022 and three more in 2023. It now expects inflation in 2021 to grow 5.3% from the prior projection of 4.2%. For 2022, it now expects inflation rate of 2.6% from 2.2% expected earlier.

The Fed expects to keep interest rates near zero only until maximum employment level is achieved. Per the recent job data published by the U.S. Bureau of Labor Statistics or BLS, total nonfarm payroll employment rose 210,000 in November, and the unemployment rate fell 0.4 percentage points to 4.2%. Construction employment rose by 31,000 for the said month backed by strong job growth in specialty trade, construction of buildings, and heavy and civil engineering construction.

Image Source: Zacks Investment Research

Continuing the positivity, single-family permits for the first 10 months of the year — issued by the Census Government — reached 948,32 (up 17.3% year over year), backed by solid regional growth.

Yet, ongoing supply chain issues, labor shortage, and affordability hurdles are concerning almost every homebuilder. NAHB chief economist Robert Dietz said, “Building has increased but the industry faces constraints, namely cost/availability of materials, labor and lots. And while 2021 single-family starts are expected to end the year 24% higher than the pre-Covid 2019 level, we expect higher interest rates in 2022 will put a damper on housing affordability.”

Per the BLS recent report, prices of goods used in residential construction ex-energy rose 1.8% in November due to price increases in nearly every product category. Robert Dietz suggests, “Policymakers need to work on supply chain improvements and controlling costly inflation. Addressing lumber tariffs would be a good place to start.”

So far this year, the Zacks Building Products - Home Builders industry has gained 32.9% compared with the Zacks Construction sector and the S&P 500 composite’s 28.5% and 26% rally, respectively. Solid buyers’ traffic depicts an encouraging picture for builders to build more.

Stocks Worth a Look

Defying all odds, we have shortlisted five top-ranked stocks from the Zacks homebuilding industry on solid demand for homes and encouraging buyers’ traffic. Investors may add these stocks to their portfolio, given their solid prospects. These stocks have been picked with the help of the Zacks Stock Screener.

Toll Brothers is a luxury homebuilding company that currently sports a Zacks Rank #1 (Strong Buy). The company is primarily gaining from limited competition in the market and the strategy of broadening product lines, price points as well as geographies.

Toll Brothers' shares have gained 65.5% so far this year. Estimates for TOL's fiscal 2022 earnings suggest 17.8% year-over-year growth. You can see the complete list of today’s Zacks #1 Rank stocks here.

Meritage Homes, a leading designer and builder of single-family homes, mainly benefits from strategic initiatives to boost profitability and focus on entry-level LiVE.NOW homes.

This Zacks Rank #1 company’s earnings are expected to grow 22.2% in 2022. Meritage Homes has gained 43.9% year to date.

Tri Pointe is involved in the design, construction, and sale of single-family detached and attached homes. Primarily, it has been gaining from robust demand, pricing and better operating leverage.

Shares of this Zacks Rank #1 company have gained 58.3% in the year-to-date period. Estimates for Tri Pointe's 2022 earnings imply 9.6% year-over-year increase.

Beazer Homes currently sports a Zacks Rank #1. This Atlanta-based homebuilder continues to gain from strong operational execution and persistent strength in the housing market.

Beazer Homes’ shares have gained 47.8% year to date. BZH's earnings are expected to rise 23.7% in fiscal 2022.

Lennar, a well known homebuilder, currently carries a Zacks Rank #2 (Buy). It is benefiting from effective cost control and focus on making its homebuilding platform more efficient, which in turn is resulting in higher operating leverage.

Lennar’s earnings for fiscal 2022 are expected to rise 5.1% year over year. LEN's shares have gained 48.3% year to date.