Meritage Homes is Tuesday's IBD Stock Of The Day as a strong rebound in new home construction in May gave a further boost to one of the stock market's hottest industry groups. MTH stock reclaimed a buy point, but the news helped put a damper on the broader S&P 500 after last week's 14-month high.
Housing Starts Weigh On S&P 500
The Commerce Department reported that housing starts surged 22% from April's downwardly revised figure to an annual rate of 1.63 million units. That included an 18.5% rise in single-family housing starts to a 997,000 annual pace, the highest since June 2022.
Higher mortgage rates "are keeping many would-be sellers in their current homes," wrote Comerica Bank Chief Economist Bill Adams, since they locked in much-cheaper mortgages when rates crashed early in the pandemic.
With relatively few existing homes available, prospective homebuyers have given new life to the newly built segment of the market, Adams said. As a result, "homebuilding is likely to be a net tailwind to economic growth in the second half of 2023."
Yet the Fed will take note of the good news for homebuilders. After skipping a rate hike last week, the Fed "will not see this helping make the case for it to remain on pause through July as well," wrote William Blair economist Richard de Chazal.
The outlook for further rate hikes will be in focus on Wednesday as Fed Chairman Jerome Powell delivers his semiannual testimony to Congress starting at 10 a.m. ET
Following the better-than-expected economic news, the S&P 500 traded moderately lower but pared losses in Tuesday afternoon stock market action. The S&P 500 was off 0.3%.
Meritage Homes' Well-Timed Strategy
Meritage Homes, based in Scottsdale, Ariz., has a strategy that seems built for current market dynamics. It caters to first-time buyers and first move-up buyers who have outgrown their first homes. Neither segment is locked into their current residence by a low-rate mortgage.
"We achieved our success this quarter by addressing the portion of the housing market buyers with the greatest need for homes as life events are necessitating a change in dwelling for them," CEO Phillippe Lord said on the April 27 Q1 earnings call.
Meritage's focus on "the most affordable segments of the market" and strategy of offering move-in-ready homes helped it become the fifth-largest U.S. homebuilder in 2022. Industry heavyweight Lennar was IBD Stock Of The Day on June 2.
Meritage saw 15% of buyers back out of sales contracts in Q1, in line with historical averages and down from an elevated 39% cancellation rate in Q4.
CFO Hilla Sferruzza noted on the call that incentives for homebuyers "are starting to moderate." She added: "The limited available inventory is allowing us to start to increase pricing where new- and existing-home inventory supplies are limited."
MTH Stock
Meritage Homes stock rose 1.85% to 132.74 on Tuesday afternoon. The move lifted MTH stock back above a 130.68 buy point from a six-week flat base.
The buy zone runs through 137.21.
The relative strength line is near highs. The RS line tracks a stock's performance vs. the S&P 500 index.
IBD Stock Checkup ranks MTH stock No. 12 in the top-tier Building-Residential/Commercial industry group, based on fundamental and technical factors.
The relative strength line for MTH stock, the blue line in IBD charts that tracks a stock's progress vs. the S&P 500, is on the cusp of a new high.
