In a clear sign that the housing industry is on a firm footing, existing home sales surged to their highest level since Feb 2007 last month. A strong labor market has led to an increase in income levels which is leading to a surge in demand for housing. Home prices are likely to rise as a result, which is a desirable outcome for the housing sector at the moment.

Since economic fundamentals remain strong and the labor market only looks stronger, the housing sector is likely to go from strength to strength in the near future. Adding housing stocks to your portfolios at such a time looks like a particularly profitable proposition.

Record Sales Experienced in March

During the month of March, existing home sales increased by 4.4% to a seasonally adjusted pace of 5.71 million. This was significantly higher than the consensus estimate of 5.58 million units. According to the National Association of Realtors (NAR), this was the sharpest pace of sales witnessed in 10 years. The NAR also said that on an average, properties were available on the market for 34 days last month, lower than the 45 day period witnessed in February.

Additionally, the total number of housing units increased by 5.8% to 1.83 million units. However, the current level of supply seems to be insufficient to meet this rise in demand, a trend borne out by the 6.6% year over year decline in housing inventory.A demand supply mismatch of this kind is likely to result in higher prices, which is a major positive for the housing sector.

Data Dips But Remains Promising

At first glance, the existing home sales report stands in sharp contrast to the rest of the housing data released this month. In March, housing starts declined 6.8% to a 1.22 million, according to data released by the Department of Commerce on Apr 18. This is lower than the consensus estimate of 1.24 million units.

But the report has a silver lining, since building permits increased by 3.6% to a 1.26 million pace. This also represents a 17% year-over-year increase and indicates that housing starts are likely to increase substantially in the near future.

Similarly, the National Association of Home Builders (NAHB) Housing Market Index decline to a level of 68 this month. April’s fall comes after the index surged to 71 in March, its highest point since Jun 2005. However, NAHB chairman Granger MacDonald stated that despite such a decline, homebuilder confidence remains appreciably high. MacDonald also said that builders had found that interest among prospective home purchasers remained strong.

Our Choices

The spurt in existing home sales firmly establishes that the housing sector is ready to growth further. A demand supply mismatch may be a cause for concern, but also indicates that a rise in prices will benefit members of the industry.

Picking stocks likely to benefit from this trend looks like a smart choice at this moment. However, picking winning stocks may prove to be difficult.

This is where our VGM score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM score. 

Louisiana-Pacific Corporation (LPX - Free Report) manufactures building materials and engineered wood products which are used by homebuilders and light commercial builders.

Louisiana-Pacific has a Zacks Rank #1 (Strong Buy) and a VGM Score of A. The company has expected earnings growth of 74.2% for the current year. Its earnings estimate for the current year has improved by 2.2% over the last 30 days.

Boise Cascade Company (BCC - Free Report) operates as a wood products manufacturer and building materials distributor.

Boise Cascade has a VGM Score of B. The company has expected earnings growth of 38.1% for the current year. Its earnings estimate for the current year has improved by 1.8% over the last 30 days. The stock has a Zacks Rank #1(Strong Buy). 

M.D.C. Holdings, Inc. (MDC - Free Report) is engaged in the construction, sale and related financing of residential housing and the acquisition and development of land for use in its homebuilding activities.

M.D.C. Holdings has a Zacks Rank #2 (Buy) and a VGM Score of A. The company has expected earnings growth of 26.6% for the current year. Its earnings estimate for the current year has improved by 0.4% over the last 30 days.

Meritage Homes Corporation (MTH - Free Report) is one of the largest single-family homebuilders in the U.S.

Meritage Homes has a Zacks Rank #2 and a VGM Score of B. The company has expected earnings growth of 4.1% for the current year. Its earnings estimate for the current year has improved by 0.2% over the last 30 days.

Armstrong World Industries, Inc. (AWI - Free Report) is a global leader in the design and manufacture of innovative commercial and residential ceiling, wall and suspension system solutions.

Armstrong World Industries has a Zacks Rank #2 and a VGM Score of B. The company has expected earnings growth of 17.1% for the current year. Its earnings estimate for the current year has improved by 0.3% over the last 30 days.