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July Housing Starts Surge 15.7% - Back on Track?

Zacks Equity Research

After upbeat homebuilder confidence data, the U.S. housing construction and building permits figures rebounded strongly in July, suggesting that the housing market recovery might finally be back on track.

Data released by the U.S. Department of Housing and Urban Development and the U.S. Census Bureau on Tuesday showed that housing starts surged to an eight-month high in July, growing 15.7% from the prior month to an annualized rate of 1.093 million units. Single-family housing starts were up 8.3%, while multifamily production jumped 28.9%. The July increase was a relief from the decline in the past two months and also beat market expectations.

Building permits, a gauge of future construction, also bucked the previous trend. After declining in June, building permits grew 8.1% in July.

Homebuilder confidence data for August released earlier this week hit its highest level since January. Homebuilders’ confidence, as indicated by the National Association of Home Builders (:NAHB)/Wells Fargo housing market index, rose 2 points to 55 in August — the third consecutive monthly gain for the index.

Homebuilder stocks rallied on the latest upbeat housing data. KB Home (KBH), DR Horton, Inc. (DHI), Lennar Corp. (LEN) and Ryland Group, Inc. (RYL) were all up more than 2%. Toll Brothers, Inc. (TOL) and PulteGroup Inc. (PHM) rose more than 1%.

The housing slowdown that began in the second half of 2013 worsened as the harsh winter in the December quarter delayed construction, raising serious doubts regarding 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, which further added to the woes. As a result, many companies witnessed declining order trends in the December quarter.

As the winter chill subsided, several homebuilders recorded improving order trends in the March quarter. However, the spring selling season turned out to be softer than expected slowing order growth on a sequential basis for large homebuilders like Lennar and Pulte in the Jun 2014 quarter.

Also, some negative housing reports around that time indicated skepticism among home buyers regarding home purchases. Pending home sales, new home sales (single-family houses), housing starts as well as building permits declined in June from the prior month.

However, the latest robust housing data raises hope that the housing sector might well be gathering steam and buyers are back in the market with improvement in the job scenario. It, however, remains to be seen whether these construction gains can be sustained through the rest of the year.

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