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New Home Sales Surge 18.6% in May

Zacks Equity Research

Data published by the U.S. Department of Housing and Urban Development on Tuesday showed that sales of new single-family homes increased 18.6% in May 2014 to a seasonally adjusted annual rate of 504,000 units. New single-family homes sales increase in May is the highest since 2008.

The beleaguered housing market is finally showing some signs of improvement as construction spending appears to have gained steadily over the spring and summer months.  It is believed that the double-digit increase in new single-family home sales was driven by the release of pent up housing demand with the improvement in the job market and weather conditions.

Regionally, the housing market witnessed improvement in all the regions. Sales rose 54.5% in the Northeast, 34% in the West, 14.2% in the South and 1.4% in the Midwest.

The housing slowdown that began in the second half of 2013 was aggravated by harsh winter in the December quarter, which delayed construction and raised serious doubts about the strength of the housing market.

Moreover, shortage of lots and skilled labor, rising cost of materials and declining inventory of new homes were not making things easier for the builders. Also, the spike in mortgage rates and rising home prices were hurting demand. As a result, many companies witnessed declining order trends in the December quarter.

However, as the winter chill subsided and spring selling season set in, many homebuilders recorded improving order trends in the March quarter. Order trends improved sequentially for D.R. Horton Inc. (DHI), PulteGroup, Inc. (PHM), Toll Brothers, Inc. (TOL) and Ryland Group, Inc. (RYL).

Around this time, the sector also reported some encouraging numbers indicating that the housing sector is gathering steam.

Homebuilder’ confidence, as indicated by the National Association of Home Builders (:NAHB)/Wells Fargo Housing Market Index, rose four points to 49 in June – indicating that builders’ expectations for the next six months have improved. The June number is just a point short of the benchmark of 50, which indicates good housing conditions.

According to recently released data provided by National Association of Realtors, existing home sales rose 4.9% in May.  

Despite the demand side of the housing market displaying encouraging signs, the supply side is under a bit of pressure, primarily due to the shortage of labor and lots. Homebuilders are exercising cautions in terms of adding to the inventory. As a result, nationwide housing production decreased 6.5% in May to a seasonally adjusted annual rate of 1.0 million units. Given the headwinds like shortage of lots and skilled labor and rising cost of materials, most homebuilders are cautiously building their inventory.

The latest data release showed that the inventory of new homes for sale was flat at 189,000 units in May, which is about 4.5-month supply given the current sales pace.

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