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Single-Family Homes Demand Bolster Builder Confidence in May

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Builder confidence increased two points to 70 in May from a downward revision of 68 in April, reinstating builders’ confidence in the current housing market. Importantly, the reading was above the 50 mark, in the first five months of 2018, indicating a favorable outlook. Moreover, this is the fourth time in 2018 that the index has reached 70.

The National Association of Home Builders or NAHB/Wells Fargo Housing Market Index (HMI) includes builder perceptions of current single-family home sales, sales expectations for the next six months and traffic of prospective buyers. Notably, current single-family home sales increased two points in May but the indices measuring buyer traffic and sales expectations in the next six months were unchanged at 51 and 77, respectively.

Consumer Demand Boosts Confidence

“The solid May report shows that builders are buoyed by growing consumer demand for single-family homes,” said NAHB Chairman Randy Noel. Solid economic growth and low unemployment levels substantiate the growing consumer demand for homes.

Although U.S. economic growth slowed in the first quarter to an annualized pace of 2.3% after averaging higher than 3% in the previous three quarters, the economy is likely to rebound in the coming quarters as the labor market is near full employment and business as well as consumer confidence is strong. The unemployment rate declined from 4.1% in March to 3.9% in April, the lowest level in nearly 18 years.

The positive momentum is expected to continue through 2018, courtesy of an improving economy, modest wage growth, low unemployment levels and a tight supply situation.

Higher Raw Material Cost Hurts

Increased lumber prices are denting builders’ earnings growth. In 2017, tariff was imposed on lumber, another major input material in the construction industry. The tariff imposed in retaliation to Canada's restrictions on the import of U.S. dairy products, averaged 20.83% on Canadian lumber imports, which are used mostly for home building in the United States.

Builders are concerned about growing labor shortage and limited land availability that are hurting margins of homebuilders like KB Home (KBH - Free Report) , D.R. Horton, Inc. (DHI - Free Report) , PulteGroup, Inc. (PHM - Free Report) and Lennar Corporation (LEN - Free Report) . Also, they are worried about higher aluminum and steel costs, thanks to newly imposed tariffs on aluminum and steel.

However, these factors haven’t had a marked impact on the industry's performance, which has been maintaining a lead position for quite some time. The Zacks Homebuilding Industry's rank (top 9% of more than 250 industries) instills investors’ confidence in this industry.

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