The homebuilding sector is currently not in good shape. The sector has been grappling with higher rates for construction and development loans, prolonged labor shortages, and a lack of land. In July 2024, existing home sales in the United States fell by 5.4% from the previous month, the sharpest monthly decline since 2022, to the fewest number of sales since the start of the year.
It was the fourth successive monthly decline in existing home sales as the median sales price climbed to a record high of $426,900. The NAHB/Wells Fargo Housing Market Index in the United States eased by one point from the previous month to 42 in July 2024, the lowest in the current year, and below market expectations of 44.
However, things may improve ahead. Mortgage rates fell to their lowest level in over a year, marking a nice development for the housing market. The average rate on the 30-year fixed-rate mortgage declined to 6.47% from 6.73% last week, Freddie Mac reported on Thursday. A year ago, the average rate on a 30-year fixed-rate loan was 6.96%.
Fed to Cut Rates in September?
Expectations that the Fed will cut interest rates in September have caused long-term bond yields to decline, which in turn has pushed mortgage rates downward. The decline in mortgage rates will boost prospective homebuyers’ purchasing power and boost sales.
Another Ray of Hope: Increased Housing Inventory
Many market watchers expect increased inventory to eventually boost home sales in the coming months. The supply of existing homes on the market increased 18.5% year over year, totaling 1.28 million homes, partly because homeowners who were waiting for mortgage rates to fall have finally decided to list their properties. Despite this increase, the inventory remains below pre-pandemic levels when mortgage rates were significantly lower.
Upbeat Industry and Sector Ranks
The Zacks Building Products – Home Builders industry contains many of these stocks and currently ranks in the top 7% out of approximately 250 industries. Because it is ranked in the top half of all Zacks Ranked Industries, we expect this group to outperform over the next 3 to 6 months. This group has seen 12.45% gains this year (versus 9.87% increase in the S&P 500) but could soar further due to the possibility of easing interest rates.
Quantitative research studies suggest that about half of a stock’s future price appreciation is due to its industry grouping. In fact, the top 50% of Zacks Ranked Industries outperforms the bottom 50% by a factor of more than 2 to 1. Not only upbeat industry rank, homebuilders hail from an upbeat Zacks Construction sector, which ranks in the top 25% out of approximately 16 sectors. The space is up 9.21% this year.
Homebuilding Industry Stocks: Compelling Valuation
The homebuilding industry trades at a forward P/E of 8.55X versus 18.66X P/E possessed by the S&P 500 ETF (IVV – Free Report) . The price-to-book ratio of the industry is also favorable at 1.46 versus 3.92 held by IVV. Price-to-sales ratio of the industry is also favorable at 0.92 compared to IVV’s ratio of 2.72.
Homebuilders Show Strong Return on Investment
The projected earnings-per-share (EPS) growth of the sector is 7.87% almost in line with IVV, while historical EPS growth was 32.95% versus 9.99% growth of IVV. The industry’s return on assets is 10.98 times compared to IVV’s return on assets of 6.76 times. Homebuilders’ return on investment is 14.75 times compared to IVV’s return on investment of 6.76 times. iShares U.S. Home Construction ETF (ITB – Free Report) and SPDR S&P Homebuilders ETF (XHB – Free Report) are two ETFs to play the sector’s new-found optimism.