Construction spending rebounded in March after struggling for months. The jump was powered by a surge in single-family homebuilding, as overall spending on private construction projects rose at a rapid pace.
The housing industry has been responsible for the overall growth in construction spending in the past and is once again boosting spending. Although mortgage rates remain a concern, single-family homes are in demand.
The housing market got a boost in March after mortgage rates fell in February. Given this situation, investing in homebuilding stocks appears to be a wise decision. We have narrowed down our search to two homebuilding stocks, such as D.R. Horton DHI and LGI Homes, Inc. LGIH.
Construction Spending Jumps
The Commerce Department reported last week that construction spending jumped 0.6% in March, surpassing analysts’ expectations of a rise of 0.2%. The jump follows a 0.2% decline in February. Year over year, construction spending rose 1.6% in March.
Spending on private construction projects climbed 0.8% in March after declining 0.2% a month earlier. Spending on homebuilding projects grew 1.7% in March, while spending on single-family homes rose 2.7%. Spending on multi-family housing units advanced 0.3% in March. Meanwhile, spending on private nonresidential ???structures declined 0.2% in March.
The construction industry has faced several challenges over the past several months. Sky-high inflation and the ongoing conflict with Iran have kept mortgage rates higher. Also, home prices have remained steep owing to higher tariffs.
Even then, demand for housing has remained high. The National Association of Realtors reported that existing home sales rebounded in April, rising 0.2% sequentially to a seasonally adjusted annual rate of 4.02 million units.
One of the major reasons behind this surge is a decline in mortgage rates in February. The 30-year fixed-rate mortgage fell to 5.98% in February, bringing in some relief for home buyers. However, high inflation and the Iran war saw mortgage rates bounce back to 6.46% in early April.
However, the demand for new homes has been high, and once the mortgage rates ease further, sales are expected to spike.
2 Homebuilding Stocks With Upside
D.R. Horton
D.R. Horton is one of the leading national homebuilders, primarily engaged in the construction and sale of single-family houses both in the entry-level and move-up markets. DHI’s operations are spread over 91 markets across 29 states in the East, Midwest, Southeast, South Central, Southwest and West regions of the United States. D.R. Horton’s houses are sold under the brand names D.R. Horton - America’s Builder, Emerald Homes, Express Homes and Freedom Homes.
D.R. Horton’s expected earnings growth rate for next year is 12.5%. The Zacks Consensus Estimate for current-year earnings has improved 1.1% over the past 60 days. DHI currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
LGI Homes, Inc.
LGI Homes, Inc. is engaged in the design and construction of entry-level homes across Texas, Arizona, Florida and Georgia. LGIH focuses on converting renters of apartments and single-family homes into homeowners by offering homes at affordable locations.
LGI Homes’ expected earnings growth rate for next year is 39.5%. The Zacks Consensus Estimate for current-year earnings has improved 12.7% over the past 60 days. LGIH has a Zacks Rank #2 (Buy).
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D.R. Horton, Inc. (DHI): Free Stock Analysis Report
LGI Homes, Inc. (LGIH): Free Stock Analysis Report
This article originally published on Zacks Investment Research (zacks.com).