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Stocks & ETFs in Spotlight as New Home Sales Touch 14-Year High

Home sales are going through the roof, as all industry watchers have been commenting over the last few months.

The Commerce Department said yesterday that new home sales rose 4.8% to a seasonally adjusted annual rate of 1.011 million units in August, the highest level since September 2006. A Reuters poll of economists was looking for a 1% dip to 895,000 units. Still, this is a relatively small segment of the market, accounting for around 10% of home sales.

The larger segment by far is existing home sales, which according to a recent report by the National Association of Realtors, grew 10.5% from August 2019, the highest rate since December 2006. These homes are also getting sold in 22 days, the fastest on record. Since supply remains tight, prices jumped 11.4% in August.

New home sales are typically recorded when the customer signs the contract. And the majority of the time, this is before construction starts or while it is ongoing. So strong growth in new home sales is a leading indicator of construction growth to come.  

Existing home sales are dependent on a number of factors. Like for example, immediately after the pandemic broke out, people didn’t want to welcome buyers in. So they took their inventory off the market. It was only later, when prices kept escalating, that they entered the market to make the most of the situation.

The shortage appears to have become even more acute of late, which has been good for prices, and therefore, margins across the homebuilding industry.

The main driver of demand is of course the pandemic, which is forcing more people to stay at home. And now that people are setting up their home infrastructure and more and more companies are adopting the work from home model, this is likely to become more of a longer-term reality. That’s why home sales will remain extremely strong in the foreseeable future.  

New waves of the virus are only strengthening this already-strong trend.

Given that backdrop, it’s clear that we would greatly benefit from jumping into this sector. We could do it with both stocks and ETFs-

When selecting stocks, it’s worth noting that the industry is in the top 2% of 250+ Zacks-classified industries. And as you all know all know it’s the top 50% that delivers the strongest returns, the higher the rank the better. So this segment is hot!

And there’s plenty to pick-  

M.D.C. Holdings, Inc. MDC, MI Homes, Inc. MHO, Meritage Homes Corporation MTH, Beazer Homes USA, Inc. BZH, KB Home KBH, Lennar Corporation LEN, Century Communities, Inc. CCS and D.R. Horton, Inc. DHI are Zacks Rank #1 (Strong Buy) stocks in this industry.

Or you could play the sector with ETFs like iShares U.S. Home Construction ETF ITB and Invesco Dynamic Building & Construction ETF PKB, because ETFs typically allow you broader exposure to the sector. ITB’s expense ratio of 0.42% makes it relatively cheaper than PKB’s 0.60%. It’s also better than the category average of 0.55%.

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KB Home (KBH): Free Stock Analysis Report
Beazer Homes USA, Inc. (BZH): Free Stock Analysis Report
Lennar Corporation (LEN): Free Stock Analysis Report
Century Communities, Inc. (CCS): Free Stock Analysis Report
D.R. Horton, Inc. (DHI): Free Stock Analysis Report
Meritage Homes Corporation (MTH): Free Stock Analysis Report
M.D.C. Holdings, Inc. (MDC): Free Stock Analysis Report
MI Homes, Inc. (MHO): Free Stock Analysis Report
iShares U.S. Home Construction ETF (ITB): ETF Research Reports
Invesco Dynamic Building Construction ETF (PKB): ETF Research Reports
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