Existing home sales for January hit the highest level since July last year. A substantial annual increase was also registered, signaling that the housing recovery was on course. This was contrary to earlier estimates that sales would decline last month.

This indicates that the housing industry is in better shape than earlier estimated. A more comprehensive analysis of the industry also indicates that homebuilders and related stocks remain a good option. This means that adding stocks from this sector to your portfolio remains a good option.

Six-Month High

Existing home sales increased 0.4% in January to a seasonally adjusted annual pace of 5.47 million. Sales touched a six-month high and joined a clutch of economic reports suggesting that the economy was in better shape than what some market watchers would have us believe.

Additionally, sales registered an annual increase of 11% last month. This was the largest yearly increase recorded since Jul 2013. The data runs contrary to the consensus estimate that sales of homes owned earlier would drop to 5.33 million from the revised pace of 5.45 million seen in December.

Industry Headwinds

A section of economists continue to believe that sales could dip over the next few months. Consumer confidence has declined sharply over February, also coming in below estimates. Additionally, the number of individuals planning to purchase a home over the next six months also declined.

Additionally, the S&P/Case-Shiller 20-City Home Price Composite recorded a 5.7% increase on a yearly basis. This raises concerns about how affordable homes would continue to be. Also, the supply of previously owned homes declined 2.2% on a yearly basis.

Prospects Remain Bright

However, home prices still rose at a pace lower than what was estimated by most economists, a 5.9% increase. More importantly, there is enough evidence to show that the housing market continues to make a slow and steady recovery. Last year was the best one for existing home sales since 2006.

Over 2015, new home sales increased 14.5% to a level not witnessed since 2007. Meanwhile, investment on construction of residential properties contributed 0.27 percentage point to otherwise disappointing fourth quarter GDP numbers. Research company Macroeconomic Advisers increased its estimate for first quarter GDP from 2% to 2.1%, primarily due to strong existing home sales. 

Meanwhile, the cost of borrowing for purchasers of home has declined over the last few weeks. Data from Freddie Mac shows that the average interest rate on a 30-year fixed-rate mortgage stood at 3.65% last week. This is considerably lower than the rate of 4.01% witnessed during end December.

Our Choices

Strong existing sales numbers clearly indicate that the housing recovery remains on track. Data on this metric as well as on new home sales recorded over 2015 also indicates that gains for the sector are likely to continue this year.

This means that the sector continues to be a good bet for investors making select stock picks a smart choice. We have narrowed down our search to the following stocks based on a good Zacks Rank and other relevant metrics.

NVR, Inc. (NVR - Snapshot Report) operates in two business segments: construction and marketing of homes and in financial services.

NVR has a Zacks Rank #2 (Buy) and expected earnings growth of 25% for the current year. Its earnings estimate for the current year has improved 2.9% over the last 30 days.

PulteGroup, Inc. (PHM - Analyst Report) engages in the homebuilding and financial services businesses primarily in the U.S.

PulteGroup has a Zacks Rank #2 and expected earnings growth of 21.9% for the current year. Its earnings estimate for the current year has improved 1.3% over the last 30 days.

TRI Pointe Group, Inc. (TPH - Snapshot Report) is engaged in the design, construction and sale of single-family homes in the U.S.

TRI Pointe Group has a Zacks Rank #2 and expected earnings growth of 53.5% for the current year. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 6.65, lower than the industry average of 9.70.

Masonite International Corp. (DOOR - Snapshot Report) is a designer and manufacturer of interior and exterior doors on a global scale.

Masonite International has a Zacks Rank #2 and expected earnings growth of for the current year is more than 100%. It has a P/E (F1) of 18.39, lower than the industry average of 18.40.

Leggett & Platt, Inc. (LEG - Analyst Report) is a manufacturer of a wide variety of engineered components and products. The company’s most important product lines include components for residential furniture and bedding.

Leggett & Platt has a Zacks Rank #1 (Strong Buy) and expected earnings growth of 4% for the current year. It has a P/E (F1) of 18.18, lower than the industry average of 18.40. Its earnings estimate for the current year has improved 3.4% over the last 30 days.

Ethan Allen Interiors Inc. (ETH - Snapshot Report) is a leading retailer and manufacturer of quality home furnishings.

Ethan Allen Interiors has a Zacks Rank #1 and expected earnings growth of 28.5% for the current year. It has a P/E (F1) of 15.74, lower than the industry average of 16. Its earnings estimate for the current year has improved 7.7% over the last 30 days.