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Housing remains on the upswing.
Home construction in the U.S. was up in July, rather unexpectedly. The housing market is now growing at the fastest rate in more than five months. Groundbreaking for new homebuilding was up 2.1% in July,
with the annual pace of new homes up to 1.2 million units. This is the highest level since February.
It appears that housing is one of the few bright spots in the current market.
U.S. homebuilders now have more homes under construction in July than any time since January 2008.
Single-family homes are perhaps the most exciting segment, as this remains the largest part of the housing market. Groundbreaking on this part of the market was up 0.5% in July, again the highest since February.
New single-family home sales hit eight-year highs in June. And with interest rates expected to remain lower for longer, the rest of 2016 could continue to roar. This should be helped by the strengthening economy and continued declines in unemployment.
The strong homebuilding data we just saw should also boost homebuilder stocks over the coming quarters. That means they could easily beat analyst estimates in the back half of 2016.
Investors can benefit from the trend. Here are two top homebuilder stocks to play the current housing market:
Top Homebuilder Stocks: NVR (NYSE: NVR)
NVR, founded in 1979, has been one of the best homebuilders in recent decades. In the last decade, NVR shares have outperformed the S&P 500 by threefold. Plus, its $1,678 a share stock price helps keep turnover and volatility in its stock low.
NVR is a builder of single-family homes and condos, operating under the Heartland Homes, Fox Ridge Homes, Ryan Homes and NVHomes names. NVR caters to all types of buyers, from first-time buyers to move-up and upscale buyers.
This homebuilder still offers the best returns on capital in the industry; its return on equity is over 30%, while the largest public homebuilder, DR Horton (NYSE: DHI), generates a ROE of less than half that.
The key to NVR’s business model is that NVR doesn’t take many risks. It only builds homes that it has already sold. It only buys lots that have been sold and on which it’s reasonably assured the home will be built. Thus, it doesn’t take unnecessary risk with land development and ownership.
Top Homebuilder Stocks: TRI Pointe Group (NYSE: TPH)
Tri Pointe is a $2.2 billion market homebuilder focused on single-family homes. It operates in just eight states, mostly in the Sunbelt. However, its shares have been relative underperformers since its 2013 IPO. Still, trading at less than 10 times earnings, it’s one of the cheapest homebuilders around.
Its focus on single-family housing is an advantage; the single-family housing market is expected to grow 17% this year. Tri Pointe’s focus market is California, where nearly three-quarters of its owned lots are located. California offers plenty of growth opportunities for TRI Pointe.
In the end, there are a number of top homebuilders out there. In the growing homebuilding market, investors might not see the significance of owning the best. But what separates a good homebuilder from a great one in this market is the ability to generate outsized returns for investors. NVR and TRI Pointe each present compelling investment opportunities.