Spending on construction projects grew in June for the third consecutive month, indicating that the economy is rebounding. The Commerce Department said on Aug 1 that spending on construction projects rose 0.5% in June, after growing 1.1% in the prior month.

On a year-over-year basis, construction spending jumped 3.5% in June. Spending on construction projects is picking up at a steady pace after slowing for months owing to higher mortgage rates and borrowing costs as a result of the Fed’s aggressive interest rate hike policy.

Spending in June was primarily driven by a jump in outlays in both single and multi-family homes. Spending on private construction projects rose 0.5%. This was driven by a 0.9% jump in residential construction projects in June, which follows a 2.9% jump in May.

Spending on single-family housing projects and multi-family housing projects climbed 2.1% and 1.5% in June, respectively. The month also saw spending on public construction projects rise 0.3%.

The housing market has been one of the biggest casualties of the Fed’s aggressive rate hike policy in its bid to combat multi-dace high inflation. The Fed has increased interest rates by 500 basis points since March 2022 before taking a brief pause in June. It again raised interest rates by another quarter percentage in July, taking the federal funds rate to the range of 5.25-5.5%.

However, there is still an acute shortage of single-family available for sale, which is helping drive spending on construction despite sky-high mortgage rates.

However, inflation has been showing signs of easing. Personal Consumption Expenditure (PCE) inflation rose 2.6% in the second quarter, while core PCE inflation climbed 3.8%. Inflation has steadily declined from the first quarter’s increase of 4.1% and 4.9%, respectively.

The headline PCE inflation increased 3% year over year in June, its lowest level in more than two years. Also, GDP grew an impressive 2.4% in the second quarter, signaling a slow but steady recovery.

The homebuilding industry is presently trying to make a recovery as spending on private residential projects continues to grow. Also, cooling inflation has raised hopes that the Fed might soon end hiking interest rates. This bodes well for the space as lower borrowing costs will attract more buyers to the housing market.

Our Choices

Given this scenario, it will be prudent to invest in homebuilding stocks with a favorable Zacks Rank that are poised to gain from the rise in spending on construction projects. We narrowed down our search to five such stocks. Each of these stocks carries either a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Lennar Corporation LEN is engaged in homebuilding and financial services in the United States. LEN’s reportable segments consist of Homebuilding, Lennar Financial Services, Rialto and Lennar Multifamily.

Lennar Corporation’s expected earnings growth rate for next year is 3.4%. The Zacks Consensus Estimate for current-year earnings has improved 29.3% over the past 60 days. LEN presently carries a Zacks Rank #1.

D.R. Horton, Inc. DHI 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 across 110 markets in 33 states in the East, Midwest, Southeast, South Central, Southwest and West regions of the United States.

D.R. Horton’s expected earnings growth rate for next year is 5.2%. The Zacks Consensus Estimate for current-year earnings has improved 7.4% over the past 60 days. DHI presently has a Zacks Rank #2.

Beazer Homes USA, Inc. BZH designs, builds and sells single-family homes. BZH designs homes to appeal primarily to entry-level and first move-up home buyers. Beazer Homes’ objective is to provide customers with homes that incorporate quality and value.

Beazer Homes’ expected earnings growth rate for next year is 9.7%. The Zacks Consensus Estimate for current-year earnings has improved 20.3% over the past 60 days. BZH presently has a Zacks Rank #1.

KB Home KBH is a well-known homebuilder in the United States and one of the largest in the state.  KBH’s Homebuilding operations include building and designing homes that cater to first-time, move-up and active adult homebuyers on acquired or developed lands. KB Home also builds attached and detached single-family homes, town homes and condominiums.

KB Home’s expected earnings growth rate for next year is 8.9%. The Zacks Consensus Estimate for current-year earnings has improved 22.4% over the past 60 days. KBH presently sports a Zacks Rank #1.

M.D.C. Holdings, Inc. MDC is engaged in homebuilding and financial services in the United States. MDC’s Homebuilding operations include land acquisition and development, home construction, sales and marketing as well as customer service. The segment delivers single-family detached homes to first-time and move-up buyers under the name “Richmond American Homes.

M.D.C. Holdings’ expected earnings growth rate for next year is 14.5%. The Zacks Consensus Estimate for current-year earnings has improved 5.9% over the past 60 days. MDC presently carries a Zacks Rank #2.

KB Home (KBH): Free Stock Analysis Report

Lennar Corporation (LEN): Free Stock Analysis Report

D.R. Horton, Inc. (DHI): Free Stock Analysis Report

Beazer Homes USA, Inc. (BZH): Free Stock Analysis Report

M.D.C. Holdings, Inc. (MDC): Free Stock Analysis Report

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