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Builders' Sentiment Rises in February as Rates Decline

Ankita Gupta

A high confidence level was seen among the nation's homebuilders in the month of February for newly built, single-family homes. Per the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), builder sentiment increased to a four-month high in February, given the ongoing reduction in mortgage rates over the past few weeks along with continued strength in the job market.

Moreover, homebuilders remain confident about the upcoming spring season as the housing market slowdown of 2018 is taking a pause or rather expected to rebound. Consequently, shares of notable homebuilding companies like Meritage Homes Corporation MTH, KB Home KBH, Toll Brothers, Inc. TOL, D.R. Horton, Inc. DHI and Lennar Corporation LEN grew 1.9%, 1.2%, 0.7%, 1.2% and 1%, respectively, on Tuesday.

Key Takeaways

Notably, NAHB’s monthly builders’ sentiment index increased four points to 62 and all three indices, namely present sales, future sales and buyer traffic, registered growth from January. The index measuring current single-family home sales increased three points to 67. Home sales prospects for the next six months grew five points to 68 and buyer traffic surged four points to 48.

In the words of NAHB Chief Economist Robert Dietz, “Builder confidence levels moved up in tandem with growing consumer confidence and falling interest rates.”

The regional HMI reading was bright for Midwest and South, increasing six and five points to 55 and 66, respectively. However, Northeast and West ended on a negative note, declining two and three points to 45 and 67, respectively.

Builders’ Confidence High on Declining Mortgage Rates

Mortgage rates have been declining since November 2018. Per the Freddie Mac’s Primary Mortgage Market Survey, in the week ending Jan 14, 2019, the 30-year, fixed-rate mortgage average declined to 4.37% from the previous week’s 4.41%. Notably, the said rate was the lowest in the past 12 months.

Also, mortgage purchase applications for the month of January remained flat on a year-over-year basis, while gained 43% from the prior month in response to the 30% increase in the new home sales figure for the month, as per the Mortgage Bankers Association (MBA) Builder Application Survey. Market pundits are of the opinion that a healthy job market, faster wage growth, moderating price gains and lower mortgage rates are helping to generate more sales.

This positive momentum that the housing industry is currently experiencing can be substantiated by its share price performance. The Zacks Building Products - Home Builders industry has outperformed the broader S&P 500 in the past three months gaining 10.7% compared with the S&P 500 index’s rally of 5%.

Meanwhile, per the Associated Builders and Contractors analysis of U.S. Bureau of Labor Statistics data on Feb 14, construction material prices fell 0.7% in January from the prior month, yet remains 1.6% higher on a year-over-year basis. Steel, aluminum and softwood lumber tariffs remain a headwind for homebuilders, making it difficult for them to offer affordable homes.

Robust Job Market Raises Hope

The buoyant employment report from the Labor Department on Feb 12, has also lifted builders’ sentiment. Per the U.S. Bureau of Labor Statistics, the number of job openings reached a record high of 7.3 million at the end of December 2018. This lifted the job openings rate to 4.7% in December from 4.6% in November, underscoring robust demand for labor. The upside stemmed mainly from strengthening payrolls and wage gains.

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