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Homebuilding Not on Shaky Ground Amid Pending Home Sales Dip

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Pending home sales dropped in April, falling to the third lowest-level of the past year, according to the latest report from the National Association of Realtors or NARs. Acute shortage of homes prevailing in many parts of the country was the main culprit.

The Pending Home Sales Index, a forward-looking indicator based on contract signings, decreased 1.3% to 106.4 in April from March. This is down from an upwardly revised 107.8 in March. The index is also down 2.1% year over year, marking the fourth consecutive month of decline.

Regionally, pending sales remained unchanged in the Northeast but dropped 3.2% in the Midwest. Pending sales were also down 1% in the South and 0.4% in the West.

April Sales: Tight Supply Continues to Trouble

Pending home sales apart, the most recent data from NARs showed that existing-home sales decreased 2.5% in April to a 5.46 million sales pace from March. With April month’s decline, sales are now 1.4% less than the year-ago level and have fallen year over year for two straight months.

Meanwhile, sales of new homes in the United States dropped in April after gaining in March. In fact, new home sales faltered in three of the first four months this year, suggesting the struggles of the housing market in winning back momentum. Housing starts and building permits also fell 3.7% and 1.8%, respectively, in the month.

The U.S. housing industry is already challenged by a shortage of homes for sale, that is pushing prices higher. Again, mortgage rates are surging in proportion to U.S. government bond yields in anticipation of higher rates of inflation and further monetary tightening by the Federal Reserve. Higher mortgage rates accompanied with higher home prices might be hitting on affordability. The national median existing-home price is expected to increase around 5.1% in 2018, per NARs.

Mortgage Rates Add to Pile of Woes

The 30-year, fixed-rate mortgage fell 10 basis points to 4.56% for the week ended May 31, 2018, down from the prior week’s 4.66%, which was the highest level since the week of May 5, 2011, according to mortgage finance agency Freddie Mac. The decline stemmed from recent trade and geopolitical issues, which led to a sudden decline in long-term Treasury yields.

However, the latest reported figure was way above last year’s May-end data. The 30-year, fixed-rate mortgage averaged 3.95% for the week ended May 25, 2017. Mortgage rates, which loosely follow the yield on the 10-year Treasury, started the year at around 4% and began rising thereafter. Meanwhile, Fed officials are on track to raise rates again in June. With the Fed announcing a hike in the benchmark Federal Funds’ target rate, mortgage rates will probably rise in the balance of 2018 or thereafter, diluting demand for new homes.

Tailwinds That Will Keep Housing on Solid Ground

Although home sales data are not impressive so far this year, homebuilders still expect strong demand for new homes as low unemployment and steady economic growth support Americans’ buying power. Builders’ 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 U.S. economy is anticipated to grow at a 4% annualized rate in the second quarter, per the latest Atlanta Federal Reserve’s GDPNow forecast. This is quite a steep rise from 2.3% GDP growth registered in the first quarter of 2018.

Again, the economy added jobs for 91 consecutive months through April 2018, helping to push the unemployment rate to 3.9%, the lowest level since 2000.

President Trump’s aim to double economic growth through an ambitious stimulus program featuring tax cuts, deregulation and higher infrastructure spending will likely drive economic growth. This is expected to provide a major boost to housing activity and form the crux of a robust demand picture.

Total home sales (new and existing) are anticipated to grow to 6.32 million (up 3% year over year) in 2018 and to 6.44 million (up 2% year over year) in 2019, as per Freddie Mac. Additionally, NAR expects existing-home sales in 2018 to increase 0.5% to 5.54 million, from 5.51 million in 2017.

These tailwinds can well be traced with the current Zacks Industry Rank for homebuilding that is within the top 18%, hinting at further growth.

We recommend stocks that are witnessing positive estimate revisions and carry a Zacks Rank #1 (Strong Buy) or 2 (Buy) like Century Communities, Inc. (CCS - Free Report) , M.D.C. Holdings, Inc. (MDC - Free Report) , KB Home (KBH - Free Report) , Meritage Homes Corporation (MTH - Free Report) , William Lyon Homes (WLH - Free Report) and Beazer Homes USA, Inc. (BZH - Free Report) . You can see the complete list of today’s Zacks #1 Rank stocks here.

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