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Builder Confidence Rises in August

Zacks Equity Research

Homebuilders’ confidence rose for the fourth consecutive month in August despite rising interest rates, recording the strongest increase in almost eight years.

The National Association of Home Builders/Wells Fargo Housing Market Index (:HMI), known as the homebuilder sentiment index, jumped three points to 59 in August from 56 in July.

The index reflects improved sales expectations backed by an increase in both the demand for and prices of new homes. Any reading on this index above 50 indicates that an increasing number of builders view the market conditions as good than poor. Of the three index components, current sales increased three points while future sales expectations went up one point. However, buyer traffic remained unchanged.

Stocks of homebuilders like D.R. Horton, Inc. (DHI), Toll Brothers (TOL), The Ryland Group, Inc. (RYL), Lennar Corporation (LEN), PulteGroup, Inc. (PHM) and KB Home (KBH) rose on the encouraging data.

The jump in the index shows that the recent interest/mortgage rate hikes have not dampened the housing recovery much. According to the Freddie Mac mortgage survey, the 30-year fixed mortgage rate has risen from 3.59% on May 23 to 4.40% on Aug 15. High interest rates decrease demand for new homes as mortgage loans become expensive, thus lowering a buyer's purchasing power.

Though interest rates have started increasing, they are still below historical levels and housing is still very much affordable. Thus, high affordability levels, increased rentals and historically-low interest rates are driving the housing momentum. In addition, accelerating job growth and increasing consumer confidence are boosting demand for new homes.

Supply however remains limited by low home inventories, both for new and existing homes. A shortage of land and labor is restricting the production of homes, both single and multi-family. Home prices have thus started moving up with market demand gaining momentum and supply remaining limited. In fact, the rising home prices and thinning home inventories have created a sense of urgency among homebuyers who are now more anxious to buy a house before prices shoot up further.

However, the housing momentum seen in 2012 and in the first half of 2013 seems to have slowed down somewhat with the recent spike in mortgage rates, tight credit availability and limited supply of land and labor.

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