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Encouraging Housing Data

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Shares of some top homebuilders traded higher at the close of trading on Jul 16, 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 6 points to 57 in July from 51 in June. This was the third consecutive monthly increase in the index and was also the strongest increase in almost eight years.

The index reflects improved 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 homebuilders like D.R. Horton, Inc. (DHI - Free Report) , Toll Brothers (TOL - Free Report) , The Ryland Group, Inc. and KB Home (KBH - Free Report) rose on improving expectations.

The jump in the index shows that the recent interest rate hikes have not dampened the housing recovery. According to the Freddie Mac mortgage survey, the 30 year fixed mortgage rate has risen from 3.59% on May 23 to 4.51% as of Jul 11.

We believe that though interest rates are increasing they are still below historical levels and housing is still increasingly affordable. Homebuilders have largely benefited from historically-low interest rates, eventually leading to the sharp increase in home buying activity since mid-2012. Moreover, Federal Reserve Chairman, Ben Bernanke’s comments last week to keep interest rates low for some time has also provided some relief. Fed plans to keep the short-term interest rates at record low even if the unemployment rate falls below 6.5%, which is Fed’s current benchmark to consider a tight monetary policy.

The Fed is currently buying $85 billion in government bonds and mortgage-backed securities a month, known as quantitative easing, to keep interest rates low and boost economic growth. Last month, however, Bernanke had announced plans to scale back this bond-buying plan and instead adopt a tighter monetary policy to avoid deflation, causing the U.S. markets to tumble. Especially, investor confidence in the overall housing recovery was shaken due to concerns of rising interest rates if a tighter monetary policy was implemented. Bernanke’s recent comments have, however, put these concerns to rest, at least for some time.

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