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Homebuilders Gain Despite a Dip in April's New Home Sales

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According to the report released by the Census Bureau and Department of Housing and Urban Development, sales of new single-family homes fell by 1.5% sequentially in April to a seasonally adjusted annual rate of 662,000.
The decline was led by a 7.9% fall in new home sales in the West, while Midwest and South remained almost unchanged. Sales, however, improved 11.1% in the Northeast.

April’s data fell shy of March’s new home sales, which were up 4% sequentially. However, the sales figure was better on a year-over-year basis. April’s new home sales were up 11.6% year over year, while the same for March increased 8.8%.

The median sales price was $312,400, down 6.9% sequentially. The average home price was $407,300, up 11.3% sequentially, due to higher construction wages and rising construction prices.

Home Builders Gain

April’s slight monthly decline in new home sales was not much of a concern as it was taken as a slight correction. Shares of prominent homebuilders such as D.R. Horton Inc. (DHI - Free Report) , Lennar Corporation (LEN - Free Report) , Toll Brothers Inc. (TOL - Free Report) and KB Home (KBH - Free Report) escalated after the release. This reinforced the positive sentiment among homebuilders.

Moreover, the recent data on builder confidence showed an increase by two points to 70 in May from a downward revision of 68 in April, reinstating optimism 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, high demand and limited supply have pushed home prices above the levels last seen in early 2006. Also, new construction remains below historically normal levels, which is exerting an upward pressure on prices. Notably tight inventories and rising home prices should aid homebuilders.
Housing demand should remain crisp from nationwide economic growth, underpinned by record low unemployment, growing wages and strong business and consumer confidence.

Headwinds Remain

Nevertheless, builders continue to face headwinds relating to high wages, paucity of land, lack of buildable lots, and increasing lumber and other raw material prices. These factors might cause home prices to escalate. This can further harm housing demand as builders pass on the high cost to home buyers. Moreover, increasing mortgage rates might be another factor inhibiting buyers to stay away from the higher burden of interest on housing loan.

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 10% among more than 250 industries) instills investors’ confidence in this space.

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