Back to top

Analyst Blog

Homebuilders’ confidence unexpectedly dipped two points in May as the spring selling season got into full swing, signaling a slower-than-expected pickup in construction activity after the first-quarter slump.

Homebuilders’ confidence for new single-family homes, as indicated by the National Association of Home Builders (NAHB)/Wells Fargo housing market index (HMI), fell two points to 54 in May from the prior month. The market, in general, was expecting a May reading of 58.

NAHB Chief Economist David Crowe attributed the slight dip in homebuilders’ confidence to consumers turning more cautious before purchasing a house. He however assured that the second quarter is “shaping up to be very solid.”

Moreover, any reading above 50 on the index indicates that more builders view housing conditions as favorable rather than poor. The latest reading was also up nine points from last year.

The spring selling season generally brings in improving sales trends. The season usually warms up in March and sees maximum business till the back-to-school season in September.

Despite a softer-than-expected start to the season, higher job numbers, a recovering economy, moderating home price gains, affordable interest/mortgage rates, rising rentals, recent federal initiatives to increase mortgage availability and a limited supply of inventory all point to an inevitable pickup in the housing market.

Even though the U.S. economy faltered in the first quarter of the year, it can mostly be attributed to the strong dollar and a harsh winter. The economy is expected to improve later this year. Rising consumer confidence, a reassuring economy and improving employment trends should lead to better home sales as the year progresses.

Last year saw moderating housing price gains on stabilizing demand. The trend is expected to continue in 2015 as well.

Moreover, housing should remain an affordable option in 2015 as mortgage rates are still below historical levels. Even if mortgage rates rise in the latter half of the year – as is widely anticipated – the rates should still remain reasonable.

Apartment rental rates have also continued to move up, making home buying more attractive than renting.

To add to the positives, plans from the White House to cut premiums on mortgage insurance should increase mortgage availability and thereby encourage activity among first-time homebuyers.

With oil prices continuing its downward journey and the economy largely on the mend, the desire to own new homes should get a shot in the arm.

Shares of major homebuilders like PulteGroup Inc. (PHM - Analyst Report), Lennar Corp. (LEN - Analyst Report), D.R. Horton, Inc. (DHI - Analyst Report) and Toll Brothers, Inc. (TOL - Analyst Report) were more or less stable on Monday despite the dip in builder sentiment as the overall housing outlook remained positive.

Want the latest recommendations from Zacks Investment Research? Today, you can download7 Best Stocks for the Next 30 Days.  Click to get this free report >>

Please login to or register to post a comment.