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Homebuilders’ confidence slipped slightly in Jan 2014 after an unexpected jump last month.

The National Association of Home Builders (NAHB) /Wells Fargo Housing Market Index (HMI), known as the homebuilder sentiment index, declined a point to 56 in January from a revised reading of 57 in Dec 2013. All the three index components — current sales conditions, future sales expectations and buyer traffic — declined in the month.

NAHB Chairman, however, said that many homebuilding markets continued to improve. Notably, according to the Chairman builder confidence “has essentially leveled out and is holding at a solid level” primarily on the December jump in the index.

Albeit interest rates are rising, these are still below historical levels and housing is still affordable. In addition, accelerating job growth and increasing consumer confidence are also boosting demand for new homes. Rising home prices, historically low interest rates and pent up demand will continue to drive the hosing momentum, according to NAHB Chief Economist, David Crowe.

Moreover, any reading on this index above 50 indicates that an increasing number of builders view the market conditions as good than poor.

Thus, despite the one point slip, most homebuilders like D.R. Horton, Inc. (DHI - Analyst Report), Toll Brothers (TOL - Analyst Report), The Ryland Group, Inc. (RYL - Snapshot Report), Lennar Corporation (LEN - Analyst Report), PulteGroup, Inc. (PHM - Analyst Report) and KB Home (KBH - Analyst Report) rose on an overall positive outlook for the sector.

The housing momentum seen in 2012 and in the first half of 2013 slowed down in the past 3–4 months due to the recent spike in mortgage rates, rising home prices, tight credit availability and the political uncertainty in Washington. However, most homebuilders believe that this is temporary and are confident of demand picking up in the forthcoming quarters. These builders expect buyers to adjust to rising prices and interest rates and return to the market.

Also, Federal Reserve’s promise to keep interest rates low for some time despite tapering its $85 billion stimulus plan by $10 billion from Jan 2014 removes a major overhang for the homebuilders.

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