2 Homebuilding Stocks in Focus as Construction Spending Rebounds

Spending on construction projects is steadily gathering pace after months of struggle. Construction spending rose for the second straight month in April, powered by a surge in spending on private projects.

The housing industry has primarily been responsible for the overall growth in construction spending. Higher mortgage rates and higher tariffs have been posing challenges for the housing industry. However, higher demand for single-family homes has been boosting spending on housing projects.

Given this situation, investing in homebuilding stocks appears to be a wise decision. We have narrowed down our search to two homebuilding stocks: D.R. Horton DHI and LGI Homes, Inc. LGIH.

Construction Spending Jumps

The Commerce Department reported last week that construction spending jumped 0.4% sequentially in April after increasing 0.2% in March and surpassing analysts’ expectations of a rise of 0.2%.

Year over year, construction spending rose 0.9% in April. The solid jump in April was powered by robust spending on private construction projects, which rose 0.4% sequentially after climbing 0.2% in March.

Investments in residential construction projects rose 0.8% in April after advancing 0.6% in the prior month.

The construction industry has been facing several challenges in recent months. Persistently high inflation and the ongoing conflict with Iran have contributed to higher mortgage rates, while home prices have remained high, in part due to increased tariffs.

Despite these headwinds, demand for housing has remained strong. According to the National Association of Realtors, existing home sales rose 3.2%  to a seasonally adjusted annual rate of 4.17 million in May from 4.02 million in April. Homebuilders are struggling to manage amid higher mortgage rates.

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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