The homebuilding industry has been on a tear lately after being stalled by the coronavirus pandemic. The twin tailwinds of tumbling mortgage rates and higher demand for new homes have been driving the stocks higher in the industry. In fact, the S&P 500’s home-building sub industry index hit its first record in 15 years on Aug 10 and more than doubled from the lows reached in late March.

Mortgage rates have been on a declining trend. According to Freddie Mac, the 30-year fixed mortgage rate averaged 2.88% for the week ending Aug 6, down from 2.99% the week before and 3.6% a year ago. This level is the lowest in its survey’s history dating back to 1971. Record-low mortgage rates are encouraging people to buy more homes and have made refinance cheaper. This trend is likely to continue at least this year on the Fed’s easy money policy and provide a boost to the homebuilder stocks.

Homebuilder confidence has also been rising. The National Association of Home Builders/Wells Fargo Housing Market Index jumped back to the pre-pandemic high in July. Additionally, new homes sales in June hit the highest level since July 2007 while existing home sales jumped the most on record. Mortgage applications to purchase a new home were up more than 50% annually in June.

A slew of stronger-than-expected earnings added to the strength lately. Moreover, homebuilders are currently well-placed, belonging to a top-ranked Zacks industry (placed at the top 8% of 250+ industries), suggesting a solid outlook. However, labor shortage, rising construction costs and high unemployment could remain as causes of concern.

Given the bullish trend, we have presented five stocks that have easily led the way higher over the past three months. These stocks carry a Zacks Rank #1 (Strong Buy), suggesting their continued outperformance. Further, these stocks have a favorable Growth Score of B or better and positive estimated double-digit earnings growth for this year. 

Meritage Homes Corporation (MTH - Free Report) – Up 57.5%

With a market cap of $3.7 billion, Meritage Homes is one of the leading designers and builders of single-family homes. The company has seen a positive earnings estimate revision of $3.80 for this year over the past three months and has an expected earnings growth rate of 42.8%. It sports a Growth Score of A.

M.D.C. Holdings Inc. (MDC - Free Report) – Up 45.7%

It is engaged in homebuilding and financial service businesses in the United States. The stock has seen a positive earnings estimate revision of $1.73 for this year over the past three months and has an expected earnings growth rate of 26.1%. It has a market cap of $2.7 billion and a Growth Score of B.

PulteGroup Inc. (PHM - Free Report) – Up 45.1%

This company is engaged in homebuilding and financial services businesses, primarily in the United States. The company has seen a positive estimate revision of 93 cents for this year over the past three months and has an estimated earnings growth rate of 22.1%. It has a market cap of $11.9 billion and a Growth Score of B.

MI Homes Inc. (MHO - Free Report) – Up 44%

MI Homes is one of the nation's leading builders of single-family homes. It has seen a solid earnings estimate revision of $3.02 for this year over the past three months and has an expected growth rate of 36.7%. MI Homes has a market cap of $1.2 billion and a Growth Score of A.

TRI Pointe Group Inc. (TPH - Free Report) – Up 40.2%

This company is involved in the design, construction and sale of single-family homes. It has a market cap of $2.2 billion and has witnessed a positive earnings estimate revision of 40 cents for this year in the past three months. TRI Pointe Group has estimated earnings growth of 12.2%. The stock has a Growth Score of A.