Shares of some top homebuilding companies traded higher at the close of trading on Monday, Jun 17, buoyed by stronger than expected housing data released recently.
The National Association of Home Builders/Wells Fargo Housing Market Index (HMI), known as the homebuilder sentiment index jumped a robust 8 points to 52 in June from 44 in May. The index crossed the 50 mark for the first time since the downturn began in mid-2006. This was also the biggest monthly increase since 2002.
The index reflects much better sales expectations for future as demand for new homes increases. Any reading on this index above 50 indicates that an increasing number of builders view the market conditions as good than poor.
Stocks of both large homebuilders like D.R. Horton, Inc. (DHI - Analyst Report), PulteGroup, Inc. (PHM - Analyst Report), Lennar Corporation (LEN - Analyst Report) and Toll Brothers (TOL - Analyst Report) as well as smaller ones like The Ryland Group, Inc. (RYL - Snapshot Report), Meritage Homes Corporation (MTH - Snapshot Report), KB Home (KBH - Analyst Report) and MDC Holdings Inc. (MDC - Snapshot Report) rose on improving expectations.
Overall, the U.S. housing market has seen significant upside in new home construction activity since mid-2012. The housing market has steadily made a comeback from the lows witnessed in mid-2006 from the severe and widespread downturn. U.S. home sales are rising as low interest rates and increased rentals have improved the affordability of homes. However, supply remains limited by low home inventories, both for new and existing homes. On top of that, strong market demand is further pushing the home prices.
Thus, large homebuilders are witnessing increasing traffic levels due to heightened consumer demand. Most homebuilding companies are witnessing a significant growth in both volumes and average selling prices (ASP).
Though overall new home sales are expected to continue rising in future months, rising input costs are a concern. As housing starts accelerate, both labor and construction material costs would continue to experience upward pricing pressure, which could impede profits of the homebuilders. Moreover, recent increase in interest rates is also concerning, though home loans are still cheaper than historical standards.
NAHB Chief Economist David Crowe believes that some of these headwinds are weakening. In-fact, recovery of the housing market is the only bright spot on the U.S. economic horizon, which is facing the threat of sequestration and a mounting national debt. As the housing market returns to its pre-downturn level, it will drive employment upward and build consumer confidence, thus providing stimulus to the overall economy. The NAHB forecasts a 29% increase in total housing starts in 2013.