Breaking a string of past four months of tepidness, builder sentiment edged two points higher this month sequentially. According to the National Association of Home Builders (NAHB)/Wells Fargo’s Housing Market Index (HMI), sentiment among U.S. homebuilders for newly-built single-family homes increased to 41 in September from 39 in August.

Image Source: National Association of Home Builders Discusses Economics and Housing Policy

Post-release on Tuesday, shares of homebuilders like Dream Finders Homes, Inc. (DFH Quick QuoteDFH - Free Report) , Century Communities, Inc. (CCS Quick QuoteCCS - Free Report) , Taylor Morrison Home Corporation (TMHC Quick QuoteTMHC - Free Report) , Meritage Homes Corporation (MTH Quick QuoteMTH - Free Report) and Tri Pointe Homes, Inc. (TPH Quick QuoteTPH - Free Report) gained 3%, 1.4%, 1.4%, 1.4% and 1.1%, respectively.

The most contributing factor that lifted confidence among U.S. homebuilders was decreasing mortgage rates, which have declined to their lowest level since February 2023. Per Freddie Mac’s recent 30-year fixed rate mortgage survey (for the week ended Sept. 12), the metric stood at 6.2% compared with 7.18% a year ago and 7.76% recorded for the week ended Oct. 26, 2023 (highest reading in the past year).

Image Source: Freddie Mac

For this month, all three HMI components grew sequentially. Current sales conditions increased one point to 45. Buyer traffic was up two points to 27, and sales prediction for the next six months rose four points to 53. The HMI gauge of future sales expectations signals improvement in housing demand going forward. The three-month moving averages for the regional HMI reading were down in the Northeast and South regions, while the Midwest and West inched up from the previous month.

Although the reading grew sequentially, a score below 50 indicates poor industry conditions in most builders’ view.

What’s Hurting the Homebuilding Industry?

Rising building costs continue to impede the construction sector as a whole, which remains a persistent challenge for housing affordability. In July, U.S. construction spending fell more than expected due to higher mortgage rates and increased supply weighed on single-family homebuilding.

Also, more competition among builders from rising housing inventory could be a potential headwind in the future. The HMI survey revealed that some builders have backed off cutting prices in September. In fact, this was the first time when average price reduction was below 6% since July 2022. Moreover, the use of sales incentives also fell to 61% in September, down from 64% in August. These data, along with high costs, may boost the affordability issue in the next couple of months.

Should You Still Invest in Housing Stocks?

Improved supply and declining mortgage rates have fueled optimism around the housing market that could continue to rebound in the coming months as well. In addition, inflation is also moderating, which is likely to create a positive ground for interest rate cuts in today’s Federal Reserve meeting. In August, the inflation rate reached a new three-year low.

On Wednesday, Fed’s chair Jerome Powell is likely to trim interest rates as inflation is approaching toward the central bank’s 2% target. This would be the first one since March 2020, when the Fed slashed rates to boost economic growth derailed due to the pandemic.

According to the CME FedWatch Tool, around 59% of market participants expect the Fed to cut interest rates by 50 basis points in the policy meeting. Approximately 41% of traders are pricing in a quarter-point interest rate cut.

August job data, particularly for construction, has also relieved the investors. Wages in August increased 3.8% year over year. Also, refinancing activity increased 1% for the week that ended on Sept. 6 from the previous week.

Image Source: Zacks Investment Research

The Zacks Building Products - Home Builders industry has gained 28.5% so far this year, broadly outperforming the Zacks Construction sector and the S&P 500 Index’s growth of 19.6% and 18.1%, respectively.

5 Above-Mentioned Housing Stocks to Look For

Here, we have discussed the above-mentioned stocks, which may not have top ranks but are worth considering on the back of impressive earnings and revenue growth rates. Also, these stocks are trading at a discount, which means that investors may be paying a lesser price for these stocks relative to their expected earnings growth.

Dream Finders Homes: This Zacks Rank #3 (Hold) company has been benefiting from a strong business model and a stabilizing economy.

The Zacks Consensus Estimate for earnings per share (EPS) has seen upward revisions. In the past 60 days, analysts have increased their estimates for the current year to $3.22 from $3.21. The estimate indicates a year-over-year growth rate of 15.4%. Revenue estimates also indicate a 13.3% increase year over year.

DFH’s forward 12-month price-to-earnings (PE) ratio of 11.11X is below the industry average of 11.85X.

Century Communities: This Zacks Rank #1 (Strong Buy) company is riding on its focus on building homes on a spec basis and affordability, along with the reduced cycle times and cost-reduction initiatives. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for EPS has seen upward revisions. In the past 30 days, analysts have increased their estimates for the current year and next year to $10.72 (from $10.64) and $12.40 (from $12.24), respectively. These estimates indicate year-over-year growth rates of 32.5% and 15.7%, respectively. Revenue estimates also indicate an 18.1% and 8.2% increase year over year, respectively.

CCS’ forward 12-month PE ratio of 8.81X is below the industry average.

Taylor Morrison: This Zacks Rank #2 (Buy) company has been benefiting from critical advantages by achieving greater scale, simplifying its operations and embracing innovation to drive both growth opportunities and enhance bottom-line growth. Focus on the operational efficiencies and solid liquidity level are tailwinds.

The Zacks Consensus Estimate for EPS has seen upward revisions. In the past 60 days, analysts have increased their estimates for the current year and next year to $8.04 (from $7.88) and $8.79 (from $8.49), respectively. These estimates indicate year-over-year growth rates of 6.2% and 9.3%, respectively. Revenue estimates also indicate a 7.1% and 8.3% increase year over year, respectively.

TMHC’s forward 12-month PE ratio of 8.13X is below the industry average.

Meritage Homes: This Zacks Rank #2 company has been reaping benefits from the resilient housing demand and the company’s progress in delivering quick-turning and affordable move-in-ready homes.

The Zacks Consensus Estimate for EPS has seen upward revisions. In the past 60 days, analysts have increased their estimates for the current year and next year to $21.09 (from $20.33) and $21.98 (from $21.53), respectively. These estimates indicate year-over-year growth rates of 5.8% and 4.2%, respectively. Revenue estimates also indicate a 2.8% and 6.9% increase year over year, respectively.

MTH’s forward 12-month PE ratio of 9.41X is below the industry average.

Tri Pointe: This Zacks Rank #3 company has been benefiting from solid homebuilding industry fundamentals, land acquisition strategy and cost-control measures. Also, strong demographics and limited availability of homes are likely to support the company in the future.

The Zacks Consensus Estimate for EPS has seen upward revisions. In the past 30 days, analysts have increased their estimates for the current year to $4.68 from $4.65. The estimate indicates a year-over-year growth rate of 35.7%. Revenue estimates also indicate an 18.3% increase year over year.

TPH’s forward 12-month PE ratio of 9.12X is below the industry average.