Pending Home Sales Sink in July: How to Play the Housing Stocks?
According to the National Association of Realtors (“NAR”) recent survey, pending home sales slipped to the lowest point in July since the index began tracking in 2001. The metric dipped strikingly after a sharp month-over-month increase of 4.8% marked in June. Probably the higher home prices and borrowing costs drove away potential buyers from the market.
On Aug. 29, the Pending Home Sales Index (PHSI) declined 5.5% to 70.2 in July from a June reading of 74.3. The metric fell in all the regions on a month-over-month basis. On a year-over-year basis, PHSI was down 8.5%, thanks to the decline in all the regions (barring Northeast).
Image Source: National Association of REALTORS
NAR’s chief economist, Lawrence Yun, also noted that job growth and higher inventory could not overcome affordability challenges and upcoming U.S. presidential election impacts.
On an encouraging note, the New England region has performed relatively better than other regions recently (in terms of home sales and prices). He stated, “Current lower, falling mortgage rates will no doubt bring buyers into market."
Also, the analysts expected this forward-looking indicator of home sales to decline 5.6% from June. This clearly indicates that analysts were more bearish about market potential.
A Sneak Peek Into the Factors Shaping Homebuilding Prospect
The Zacks Building Products - Home Builders industry rose 23.2% so far this year compared with the Zacks Construction sector and the S&P 500 Index’s 16.9% and 17.2% growth, respectively. The industry is seeking signs of positivity following Federal Reserve Chair Jerome Powell's clear signal to financial markets for a potential rate cut in September.
Image Source: Zacks Investment Research
The Fed is projected to lower interest rates in September. Although this move may be viewed favorably, it is unlikely to have an immediate impact on businesses. Also, the 30-year fixed rate mortgage is now 6.35% for the week ending Aug. 29, declining to the lowest since May 2023.
Image Source: Freddie Mac
Consumers are showing optimism about a growth trend in the industry. On Tuesday, the Conference Board reported that the Consumer Confidence Index for August rose to 103.3 from July, up from a revised June figure of 101.9. Consumers expressed greater confidence in both current and future business conditions. Additionally, the average 12-month inflation expectations reached their lowest level since March 2020.
Yet, the labor market is still a concern, reflecting the recent increase in unemployment. In July, the unemployment rate rose to 4.3% from 4.1% in June, per the latest report of the U.S. Bureau of Labor Statistics.
Housing prices also remained elevated year over year to 5.7% in the second quarter of 2024 and 0.9% sequentially. Although the pace was slower due to a higher inventory of homes for sale, this is still keeping consumers away from deciding to buy homes in the near future.
Although mortgage rates are expected to continue to decline, a rebound in purchase activity remains elusive.
A Look at Prominent Homebuilders’ Orders & Outlook
Let's examine homebuilders who are seeing a surge in orders despite facing challenges and raised views.
PulteGroup, Inc.’s PHM balanced operating model resulted in increases in closings, average sales price, and gross margin, which collectively led to a 19.3% increase in earnings in second-quarter 2024. It currently carries a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
PHM’s new home orders declined 3.7% year over year to 7,649 units in the second quarter. Yet, the value of new orders also rose 2% from a year ago to $4.4 billion. PHM has provided solid third quarter and 2024 guidance for homes closed.
Meritage Homes Corporation MTH has been banking on resilient housing demand and the company’s progress in delivering quick-turning and affordable move-in-ready homes. The current backdrop of underbuilt supply of homes in the market has been acting as a catalyst in fueling the demand for newly built homes, thus increasing order volumes. It currently carries a Zacks Rank of 2.
MTH’s total home orders in second-quarter 2024 rose 14% from the prior year to 3,799 homes. In dollars, home orders increased 7% year over year to $1.57 billion. A 6% lower ASP of $414,000 due to both geographic and product mix shifts impacted growth to some extent. Owing to the improving trend, the company raised its home closing revenues and earnings outlook for 2024.
Toll Brothers, Inc.'s TOL emphasis on affordable luxury communities, build-to-order model and land acquisition strategies bodes well. The lack of competition in the luxury housing market is a competitive advantage adding to the company’s growth. It currently carries a Zacks Rank #3 (Hold).
In third-quarter fiscal 2024, net-signed contracts were up 11% year over year to 2,490 units. The value of net signed contracts was $2.41 billion, reflecting a rise of 11% year over year. Backed by solid fiscal third-quarter performance and expectations for the fiscal fourth quarter, TOL has raised its full-year guidance for all key homebuilding metrics.
D.R. Horton, Inc. DHI experienced strong performance in the third quarter of fiscal 2024 due to the limited supply of both new and existing homes at affordable price points and favorable housing demand demographics. The company's strategic positioning with affordable product offerings and a flexible lot supply has been crucial. It currently carries a Zacks Rank of 3.
Net sales orders during the fiscal third quarter were up 1% year over year to 23,001 homes. The value of net orders was flat year over year at $8.7 billion. DHI has also raised its full-year guidance for all key home building metrics.
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