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Homebuilder Confidence Rises in June: Is Housing Recovering?

Zacks Equity Research

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.

Homebuilders’ 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 the builders’ expectations for the next six months have improved.

The index dropped to below 50 in the past four months from 56 recorded in January, indicating increasing builder concerns about meeting ongoing and future demand due to a shortage of lots and labor. The June number is just a point shy of the benchmark of 50 which indicates good housing conditions.

The housing slowdown that began in the second half of 2013 was aggravated by harsh winter in the December quarter, delaying construction and raising serious doubts as to 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) (RYL). Around this time, the sector also reported some encouraging numbers indicating that the housing sector is gathering steam.

New home sales for April, as reported by the Commerce Department, rose 6.4% from March. Though sales were down 4.2% compared with the prior year, it nevertheless marks an improvement from the previous month. New home sales numbers for May are expected on later this month.

Building permits, a gauge of future construction, also bucked the previous trend. After declining for four times in five months, building permits grew 8% in April from the previous month.

Existing home sales data increased 1.3% to a seasonally adjusted annual rate of 4.65 million in April from 4.59 million in March. Existing home sales rose for the first time this year at the fastest pace since Dec 2013.

These encouraging data signal that the housing sector might be on the verge of a recovery. Though headwinds from supply shortage and rising land, material and labor costs exist, homebuilders are increasingly optimistic of improving demand in the future quarters.

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