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Builders Revving Up As Sentiment Rises And Supplies Fall

Builders broke ground on more homes than expected in December, a sign of continued confidence in a tenacious housing recovery.

Housing starts fell 9.8% to an annualized rate of 999,000, the Commerce Department said Friday, but that followed November's 23.1% spike to a 6-year high. Last month's pace was higher than the 985,000 consensus, with the harsh weather likely contributing to the decline.

Some 923,400 homes were started last year, up more than 18% over 2012.

"Sales are moving along and the future is bright," said Keith Gumbinger, vice president of HSH.com, a mortgage-lending website.

The National Association of Home Builders said Thursday that optimism among builders slipped a notch in January, to 56, but remained firmly in positive territory. That survey's subindexes signaled even stronger conditions for current and future sales.

"Builders have been increasingly happy because they're building again," Gumbinger said. "That's because 2014 is expected to be a pretty good year.

New construction of single-family homes hit 667,000 units in December, well above the 12-month average of 621,000.

The number of new homes finished but not sold has increased from a record low earlier in the cycle, but at 167,000 remains historically low.

There are 5.1 months' worth of existing homes at the current sales pace, according to the National Association of Realtors. Normal inventories would be six to six-and-a-half months' worth, said Celia Chen, a director with Moody's Analytics.

Foreclosure activity has fallen to a six-year low, meaning the huge overhang of supply is fading away.

Such constrained inventory has been "very supportive" for builders, who started to respond.

Home sales did take a breather in the summer as interest rates jumped more than a full percentage point in anticipation of Federal Reserve tapering. The Mortgage Bankers Association on Jan. 14 lowered its 2014 forecast for mortgage purchases by about 5% based on higher borrowing costs.

But most analysts believe that with the Fed actually starting to taper asset purchases over the course of 2014, such huge spikes won't be repeated. Rates averaged 4.72% in the Jan. 10 week, a 6-basis-point decline over the prior week, and applications to buy a home surged 12%.

"No one's interested in seeing higher financing costs, but higher rates are already in play," Gumbinger said. "No one should be afraid of a 5-handle.

But it would be worrisome if rates kept rising along with prices, Gumbinger said.

Rates had been kept "unnaturally low," Chen said, and she believes future increases will move in tandem with an improving economy. Even if prices rise along with rates, she said, an improving job market should offset those increases. Prices will likely appreciate at a slower pace in 2014 after running red-hot for much of 2013, which will help keep affordability in reach.

Builders have been conservative with supply in part to keep prices — and profits — rising. But despite strong earnings gains and generally bullish outlooks, shares of PulteGroup (PHM), Lennar (LEN) and D.R. Horton (DHI) remain well below their May peaks.