The confidence level among the nation's homebuilders for newly-built, single-family homes remained unchanged in September from the prior month on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI). Although builders remain perturbed with rising costs and continued shortage of skilled labor, a growing economy and rising income along with increasing household formations raise optimism. Notably, any reading more than 50 signals improving conditions.

Shares of homebuilders like KB Home (KBH - Free Report) , NVR, Inc. (NVR - Free Report) , D.R. Horton (DHI - Free Report) , Lennar (LEN - Free Report) and PulteGroup, Inc. (PHM - Free Report) rose 2.5%, 2%, 1.5%, 1.3%, 1.1% respectively, on Tuesday. The exchange-traded fund or ETF, namely iShares U.S. Home Construction ETF (ITB- Free Report), which tracks the homebuilding industry, rose on Tuesday, after the news release.

The September 2018 reading was up three points to 67 from the year-ago period. Two of the three HMI components grew in September. Current sales conditions increased one point to 74. Buyer traffic held steady at 49 and sales prediction over the next six months rose two points to 74. Importantly, the HMI gauge of future sales expectations remained in the 70s, signaling that housing demand should continue to grow this year.

Hurricane Florence & Effect on Housing

Florence, the first major hurricane to threaten eastern United States this year, could be damaging for some sectors like restaurant, insurance, and agriculture. NAHB expects this category 1 storm to disrupt some real estate markets. Notably, single-family construction in North Carolina, South Carolina, and Virginia makes up 12% of national production.

That said, homebuilding companies or building product suppliers will remain in focus as cleanup and rebuilding efforts pick pace.

Affordability & Rising Costs Continue to Play Spoilsport

Challenges like inventory shortage are prevailing in the U.S. real estate market and creating upward pressure on prices in several parts of the country, thereby affecting affordability. Additionally, mortgage rates are surging in proportion to U.S. government bond yields, in anticipation of higher rates of inflation and further monetary tightening by the Fed.

Meanwhile, August construction material prices increased 8.1% year over year but decreased 0.5% month over month, according to an Associated Builders and Contractors (“ABC”) analysis of information provided by the U.S. Bureau of Labor Statistics.

Homebuilding stocks have already been thrashed this year in anticipation of slower growth in housing and higher costs for construction companies. Homebuilding industry has lost 23% this year, whereas the broader S&P 500 Composite market has gained 8%.

Strong Demand & Economic Growth Raise Hope

Undeniably, there have been indications that the thriving housing market are being hammered now and then this year. Nevertheless, we cannot ignore the strong demand trend for new houses prevailing in the market. As per the latest report, new home sales figure was 12.8% higher in July than the year-ago reading, reflecting strong demand for homes as the economy continues to create jobs.

Meanwhile, residential construction grew 6.6% in July from the year-ago period with new single-family and multi-family construction increasing a respective 6% and 1.1%, according to the latest report of the U.S. Census Bureau of the Department of Commerce. A spur in homebuilding activity and publicly-funded building of schools and highways led to an uptick in U.S. construction spending in July.

Additionally, another welcome relief for the industry is lumber price. Softwood lumber prices decreased 9.6% in August from the prior month, according to the latest release by ABC. Although the August figure was up 5% on a yearly basis, it was down from 19.5% in July. Yet, economists are of the opinion that this price trend of softwood lumber, which is the subject of an ongoing trade dispute with the Canadians, may not continue amid a solid backlog level in both public and private construction segments.

Stocks to Bet On

Adding some housing stocks to your portfolio looks like a smart move at this point, as there are plenty of reasons to be optimistic about the broader housing sector over both the short and the long term. However, picking winning stocks may be difficult.

With the help of the Zacks Stock Screener, we have zeroed in on five stocks that have a Zacks Rank #1 (Strong Buy) or 2 (Buy) and favorable metrics. A top Zacks Rank indicates that these stocks have been witnessing positive estimate revisions, which generally translates into rapid price appreciation. 

D.R. Horton, Inc. 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. The stock sports a Zacks Rank #1 and has a favorable Value Score of B, Growth Score of A and Momentum Score of B. The company has solid expected earnings growth of 41.2% for the current year and 20% for the next.

PulteGroup Inc. engages in the homebuilding and financial services businesses primarily in the United States. The stock sports a Zacks Rank #1 and has a favorable Value Score of A and Growth Score of A. The company has solid expected earnings growth of 61.2% for the current year and 10.4% for the next.

Trex Company, Inc. (TREX - Free Report), a manufacturer of wood-alternative decking and railing, sports a Zacks Rank #1 and has a favorable Growth Score of A and Momentum Score of A. The company has solid expected earnings growth of 48.7% for 2018 and 10.4% for 2019.

Century Communities Inc. (CCS - Free Report), a homebuilding and construction company, has a Zacks Rank #2 and a Value Score of B. The company has solid expected earnings growth of 27.2% for the current year and 31.1% for the next.

Beazer Homes USA, Inc. (BZH - Free Report), a homebuilding company engages in designing, building and selling of single-family homes, carries a Zacks Rank #2. The stock has a Value Score of B and expected earnings growth of 13.6% for the current year and a solid 46% for the next.