According to a report issued by the National Association of Realtors (NAR), there was a sharp rebound in pending sales of existing homes in February. Basically, a sale is listed as pending when the contract has been signed but the deal is yet to close -- this usually happens within a month or two of signing.

The NAR data shows that the Pending Home Sales Index jumped to 112.3 in February, up 5.5% from January and 2.6% above the year-ago period. The data indicates that the Feb 2017 number is the highest over the last 10 months (113.6 in Apr 2016) and the second highest since May 2006.

What Drove the Uptick?

The February data is a marked improvement from January when insufficient supply levels as well as deteriorating affordability had led to a 2.8% dip in the Pending Home Sales Index.

Several factors helped drive the uptick in pending home sales in February. The continued rise in the stock market, an improving employment scenario as well as the possibility of paying higher interest rates later this year has resulted in an increasing interest in buying homes. Moreover, a warm February spurred potential home-buyers to start their house-hunting.

The NAR said that all major regions saw a notable increase in contract activity in February with the Index rising 3.4% in the Northeast and 11.4% in the Midwest. The South and West saw increases of 4.3% and 3.1%, respectively.

Existing-home sales are expected to grow 2.3% in 2017 to about 5.57 million with the national median existing-home price expected to increase around 4%.

Picking the Right Stocks

The NAR report bodes well for the spring home-selling season which is usually the busiest period for home sales. Moreover, estimates released jointly by the U.S. Census Bureau and the U.S. Department of Housing and Urban Development last week show that new home sales in Feb 2017 increased 6.1% from Jan 2017 and 12.8% from the year-ago period.

Favorable demographics, pent-up demand, improving economy and job market, low interest rates and low inventory of new and existing homes are some of the factors that should support sustained growth in housing demand.

The Home Builders segment also enjoys a good Zacks industry rank (Top 43% out of 256 industries). The Zacks-categorized Building-Residential/Commercialindustry has outperformed the broader market (S&P 500) year-to-date (YTD) as well.

(Click on image to enlarge)

With the help of the Zacks Stock Screener, we have zeroed in on three housing stocks with a VGM Score of “A” or “B” and a Zacks Rank #1 (Strong Buy) or #2 (Buy). Our research shows that stocks with a VGM Score of “A” or “B” when combined with a Zacks Rank #1 or #2 offer the best upside potential. You can see the complete list of today’s Zacks #1 Rank stocks here.

KB Home (KBH - Free Report) : Los Angeles, CA-based KB Home is among the largest and most recognized homebuilding companies in the U.S. The company sells and builds new homes designed primarily for first-time, move-up and active adult homebuyers. KB Home’s focus is on first-time buyers, which represents the largest demand segment. The company recently reported better-than-expected results for the first quarter of fiscal 2017 and raised its housing revenue guidance for the year. A solid backlog and a favorable market environment bode well for this Zacks Rank #2 stock which has a VGM score of “A”. Earnings estimates for fiscal 2017 and fiscal 2018 are up 3.9% and 6%, respectively, over the last 7 days. YTD, KBH has outperformed the Zacks-categorized Building-Residential/Commercial industry with shares gaining 25.9% compared to the industry gain of 24%.

(Click on image to enlarge)

Lennar Corporation (LEN - Free Report) : Miami, FL-based Lennar is among the nation's largest home builders. The company, which surpassed estimates in the first quarter of fiscal 2017, looks positioned to benefit from renewed optimism, wage and job growth, and consumer confidence. Accelerating sales pace, limited land and labor supply plus tight inventory especially at the lower price points bode well for increased pricing power and earnings. Earnings estimates for fiscal 2017 and fiscal 2018 are up 1.2% and 2.9%, respectively, over the last 7 days. Lennar is also a Zacks Rank #2 stock with a VGM score of “A”. 

(Click on image to enlarge)

PulteGroup, Inc. (PHM - Free Report) : Atlanta, GA-based PulteGroup is one of the largest and most experienced homebuilders in the U.S. The company has a strong earnings track record having surpassed expectations in three of the four quarters of 2016 and meeting expectations in the remaining quarter. The company caters to all major buyer groups: first-time, move up and active adult. PulteGroup, which has a VGM score of “B”, is also a Zacks Rank #2 stock.

The company has outperformed the Zacks-categorized Building-Residential/Commercial industry YTD with shares gaining 29.2%.