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Homebuilders Accelerate New Construction as More People Look to Buy a House

By Lou Whiteman - Updated Aug 18, 2020 at 11:04AM

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New housing starts and permits both soar, implying companies expect strong demand in the months to come.

U.S. home construction starts jumped 22.6% in July, the best gain since October 2016, as builders react to record low interest rates and a resilient economy by increasing residential building.

Residential starts jumped to a 1.496 million annualized rate in July, according to U.S. Census data released Tuesday, beating analyst expectations for 1.25 million. Building permit applications came in at an annualized rate of 1.495 million, better than the 1.3 million consensus estimate and up 18% from June.

A house under construction.

Image source: Getty Images.

Housing starts are a measure of the number of new residential construction projects that began in a month and aren't directly tied to demand. But builders normally increase construction based on inbound interest, implying they are seeing strong demand for new housing.

Single-family home permits increased by 17% to an annualized rate of 983,000, the strongest number since the start of the COVID-19 pandemic. Multifamily starts, a category that includes apartment buildings and condominiums, surged 58% to 556,000 annualized.

The strength in residential construction is being fueled by low interest rates and increasing consumer confidence that the economy will be able to withstand the pandemic. A 30-year fixed rate mortgage is currently priced at less than 3.2%, and a 15-year mortgage is about 2.66%, giving would-be buyers plenty of reason to go shopping.

The strong permit applications number is an indication that builders intend to be active for a while, and are not just playing catch-up following a few rough months during the pandemic.

The strong housing data should be good news for homebuilders including KB Home (KBH -2.82%), NVR (NVR -4.13%), LGI Homes (LGIH -2.97%), and Meritage Homes (MTH -3.65%), as well as for home improvement retailers Home Depot (HD -2.17%) and Lowe's (LOW -3.29%).

Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Home Depot and NVR. The Motley Fool owns shares of LGI Homes. The Motley Fool recommends Lowe's and Meritage Homes and recommends the following options: long January 2021 $120 calls on Home Depot and short January 2021 $210 calls on Home Depot. The Motley Fool has a disclosure policy.

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Stocks Mentioned

KB Home Stock Quote
KB Home
$31.40 (-2.82%) $0.91
NVR, Inc. Stock Quote
NVR, Inc.
$4,193.24 (-4.13%) $-180.76
Meritage Homes Corporation Stock Quote
Meritage Homes Corporation
$83.29 (-3.65%) $-3.16
LGI Homes, Inc. Stock Quote
LGI Homes, Inc.
$106.51 (-2.97%) $-3.26
The Home Depot, Inc. Stock Quote
The Home Depot, Inc.
$305.21 (-2.17%) $-6.76
Lowe's Companies, Inc. Stock Quote
Lowe's Companies, Inc.
$195.20 (-3.29%) $-6.64

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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