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September Builder Sentiment Up Amid Supply-Side Challenges

Zacks Equity Research

Builder sentiment for newly-built single-family homes inched higher in September, matching the highest reading in a year. Notable homebuilders like KB Home KBH, TRI Pointe Group, Inc. TPH, Meritage Homes Corporation MTH, NVR, Inc. NVR, and D.R. Horton, Inc. DHI jumped 3%, 2.8%, 2%, 1.7%, and 1.4%, respectively on Sep 17, following the news. The improvement mainly stems from a sharp drop in mortgage rates and solid housing demand.

In fact, homebuilding industry has been rallying since January, buoyed by above-mentioned tailwinds. The Zacks Building Products - Home Builders industry has risen 39.5% so far this year, comparing favorably with the S&P 500’s rally of just 18.2%.

However, ongoing supply-side challenges and general market uncertainty are affecting order flow. Housing giants are being cautiously optimistic about the industry’s future prospects due to rising land, labor and construction costs, shortage of skilled labor and increasing incentives to drive sales.

Let’s Delve Deeper

Per the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), confidence level among builders grew one point to 68 in September from an upwardly revised August reading of 67. Notably, this marked the highest reading since October 2018.

Encouragingly, a gauge of present sales conditions increased two points to 75 from August. Meanwhile, buyer traffic remained firm at 50 but sales prediction for the next six months fell one point to 70.

The three-month moving averages for regional HMI reading was bright for Northeast, West and South. While both Northeast and West reported two-point gain to 59 and 75, respectively, South rose one point to 70 from the prior-month figure. However, Midwest remained unchanged at 57 from a month ago.

Can Low Mortgage Rates Help Housing Industry Rebound?

In the recent Primary Mortgage Market Survey report published by Freddie Mac, the 30-year, fixed-rate mortgage average declined to 3.56% from the previous year’s 4.60%. Also, mortgage purchase applications for the month of August increased 33% on a year-over-year basis, per the Mortgage Bankers Association (MBA) Builder Application Survey (BAS). However, it declined slightly from a month ago.

Although this declining trend is considered to be good for housing, the overall residential construction sector has been softening. Though low interest/mortgage rates and solid demand have fueled builders’ sentiments, affordability challenges and soft home-building activity remain concerns. This demand-supply disparity has pushed home prices higher, forcing many potential buyers to the sidelines.

Importantly, lack of supply has been the biggest hurdle in the path of housing market recovery. Also, entry level buyers, now playing a key role in home buying activity, are more interested in urban and suburban homes where construction activity remains muted.

Last but not the least, builders are concerned about the uncertainty arising from the ongoing U.S. – China trade war. NAHB’s Home Building Geography Index indicates that although rural and exurban areas are witnessing growth in construction, the slowdown in the manufacturing sector is holding back home construction in some parts of the country. And, we cannot deny the fact that millennials are somewhat hesitant about investing their hard-earned money in this extremely volatile market.

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