The U.S. construction is trying to stage a steady comeback as price pressure and borrowing rates continue to ease. September saw a modest rise in construction spending. However, it hit a four-month high, indicating that the sector is recovering from its earlier lows.

Residential construction, which had largely been responsible for driving construction spending in the past, saw an uptick in September, fueling overall spending on construction. Homebuilder confidence is also rising fast, with building permits and housing starts jumping in a sign that the homebuilding market can once again boost the construction sector.

Given this situation, investing in homebuilder stocks like KB Home KBH, Toll Brothers Inc. TOL and Taylor Morrison Home Corporation TMHC would be a wise decision. Each of these stocks carries a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Construction Spending Jumps in September

The Commerce Department said on Friday that construction spending rose 0.1% month over month in September to $12.5 trillion, the highest level since May. This exceeded economists’ expectations of construction spending to remain flat in September.

Year over year, construction spending jumped 4.6%. In the first nine months of the year, construction spending totaled $1.6 trillion, up 7.3% from the year-ago figure of $1.5 trillion. Also, the Commerce Department upwardly revised the September figure to 0.1% from a 0.1% decline.

Construction spending indicates the amount of money the government and private enterprises allocate to various projects, including housing and infrastructure like highways. Increased spending on construction means a rise in overall economic activity.

Spending on residential construction projects jumped 0.2% to $913.6 billion. Non-residential construction rose 0.1% to $740 billion. Public construction spending rose 0.5% to $141 billion.  

Housing Market to Help Homebulder Stocks

The Housing Market Index (HMI) from the National Association of Home Builders (NAHB) and Wells Fargo shows that confidence among U.S. homebuilders for new single-family homes rose to 41 in September, up from 39 in the previous month.

The boost in sentiment is attributed to a drop in mortgage rates, which have reached their lowest point since February. The 30-year fixed mortgage rate is now 6.7%, compared with 7.18% a year earlier. Although mortgage rates peaked at 7.76% in October 2023, they have since decreased significantly.

Declining mortgage rates are making homebuilders spend more on construction activity. Housing starts for privately owned homes rose 9.6% in August, reaching an annualized rate of 1.356 million, surpassing the expected increase of 2.9%. Also, residential building permits, which serve as a gauge for construction activity, increased by 4.9% in August compared with the previous month, reaching an annualized rate of 1.475 million units.

The Federal Reserve cut interest rates by 50 basis points in September, easing price pressure and borrowing rates. Market participants are now hopeful about a 25-basis point rate cut in November, which would further help the homebuilding and overall construction sector.

Homebuilder Stocks With Upside Potential

KB Home

KB Home is a well-known homebuilder in the United States and one of the largest in the state.  KBH’s Homebuilding operations include building and designing homes that cater to first-time, move-up and active adult homebuyers on acquired or developed lands. KB Home also builds attached and detached single-family homes, townhomes and condominiums.

KB Home’s expected earnings growth rate for the next year is 20.1%. The Zacks Consensus Estimate for current-year earnings has improved 0.5% over the past 90 days. KBH presently carries a Zacks Rank #2.

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Toll Brothers

Toll Brothers builds single-family detached and attached home communities, master-planned luxury residential resort-style golf communities, and urban low, mid, and high-rise communities, principally on the land it develops and improves. TOL operates in Arizona, California, Florida, Delaware, Maryland, Pennsylvania and South Carolina. Toll Brothers offers homes under two segments, namely Traditional Home Building Product and City Living.

Toll Brothers’ expected earnings growth rate for the current year is 17.6%. The Zacks Consensus Estimate for current-year earnings has improved 3.6% over the past 90 days. Toll Brothers presently has a Zacks Rank #2.

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Taylor Morrison Home

Taylor Morrison Home is a homebuilder and land developer engaged in building single-family detached and attached homes for first-time buyers, move-up families, and luxury and active adult customers. TMHC operates under the Taylor Morrison brand, Monarch brand and Darling Homes brand. Taylor Morrison Home operates in Arizona, California, Colorado, Florida and Texas.

Taylor Morrison Home’s expected earnings growth rate for next year is 11%. The Zacks Consensus Estimate for current-year earnings has improved 4.5% over the past 90 days. THMC currently sports a Zacks Rank #1.

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