Sales of previously owned homes decreased in December 2017, as low inventory is limiting the choice of prospective buyers and keeping price growth elevated. Again, unseasonably cold weather also accounted for a bit of the downfall.

December Existing Home Sales Data

As revealed by the National Association of Realtors (NAR), existing-home sales slipped 3.6% in December to a seasonally adjusted annual rate of 5.57 million units from a downwardly revised 5.78 million in November after three straight months of strong increases. Nonetheless, existing home sales, which account for about 90% of U.S. home sales, grew 1.1% on a year-over-year basis during the month.

Also, December’s median sales price grew 5.8% from the comparable period a year ago to $246,800, marking the 70th straight month of year-over-year gains. For 2017, prices increased 5.8%, rising for the sixth straight year.

Again, inventory continues to slip, leaving less homes for future sales. The supply of existing homes decreased 11.4% from November and 10.3% from the year-ago period. It has fallen year over year for 31 consecutive months. As such, it will take only 3.2 months to deplete the current supply of homes in the market, according to NAR. This is also the lowest reading since the group began tracking the data in 1999.

An Impressive 2017 for Homebuilding

Although the December housing data were not impressive, the larger picture is overwhelming for 2017. Existing home sales concluded the year with 1.1% gain to 5.51 million units, the highest since 2006. Building permits increased 4.7% and housing starts increased 2.4% in 2017 from the 2016 figure. The industry advanced almost 69% in 2017, outperforming the broader market’s (S&P 500) growth of 19.7%.

Moreover, January 2018 builders’ confidence reading remained in the 70s, signaling that housing demand should continue to grow this year.

U.S. Housing Signaling a Positive 2018 Amid Odds

Although inventory constraints have been consistently pulling the housing market down, robust demand is keeping the industry alive. This is primarily because of solid labor market that is near full employment.

Other hurdles such as rising prices owing to the limited land availability are keeping the affordability in check. Again, homebuilders continue to struggle with growing labor shortage, higher material costs, and a constrained mortgage environment.

Market pundits are a shade worried that rising mortgage rates and caps on the deduction for mortgage interest following a recent overhaul of the tax code is likely to slow demand this year. That said, the latest report from the Mortgage Bankers Association, released on Jan 24, showed applications for loans to buy a home surging last week to their highest level since April 2010. Hence, despite concerns of chances of a series of interest rate hikes by the Federal Reserve, that are restricting homebuilders to respond to the growing demand to some extent, the overall demand picture remains quite strong, courtesy of strong economic growth and low level of unemployment.

Investing in the homebuilding industry might sound profitable right now, as it falls within the top 8% (20 out of 256 industries) of the Zacks Industry Rank, which hints at further growth.

Stocks to Bet on

We have identified five homebuilding stocks based on a favorable combination of a Zacks Rank #1 (Strong Buy) or 2 (Buy) and a Growth Score of A or B. These stocks are backed by sound fundamentals, surging share price and a track record of better-than-expected results. You can see the complete list of today’s Zacks #1 Rank stocks here.

Here are the top five stocks that passed the screen.

NVR, Inc. (NVR - Free Report) carries a Zacks Rank of #2 (Buy) and has a Growth Score of A. It is expected to witness year-over-year EPS growth of 24.4% in 2018. In the last year, the stock has surged almost 91%, outperforming the industry growth of 58.7%.

KB Home (KBH - Free Report) has escalated more than 105% in the last year and carries a Growth Score of A. This Zacks Rank #2 stock’s earnings are expected to witness 36.2% growth this year.

D.R. Horton, Inc. (DHI - Free Report) has a Zacks Rank 2 and a Growth Score of B. The homebuilder’s current-year earnings are expected to grow 28.1%. This stock has climbed 67.2% in the last year, more than the industry.

Lennar Corporation (LEN - Free Report) carries a Zacks Rank #2 and a Growth Score of B. Earnings for this leading homebuilder is expected to grow 34.9% this year. The stock has climbed more than 65% in the past year.

Persimmon Plc (PSMMY - Free Report) has returned nearly 66% in the last year. The stock sports a Zacks Rank #2 and a Growth Score of B. The company has solid expected earnings growth of 41% for the current year.