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Can the Housing Sector Overcome Affordability Concerns?

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In October, existing-home sales registered the first increase in six months, providing a glimmer of hope to the beleaguered housing sector. Buyers have been plagued by affordability concerns for some time now as mortgage rates rise and wages struggle to keep pace with rising home prices.

Meanwhile, tariffs have pushed up raw material costs even as the labor market grows tighter for homebuilders. These concerns have been reflected in the recent sharp drop in homebuilder confidence. Meanwhile, housing starts posted a monthly increase in October but single-family starts have declined.

Existing-Home Sales Post First Gains in 6 Months

According to the National Association of Realtors (NAR), existing-home sales increased 1.4% from the level recorded in September to a seasonally adjusted rate of 5.22 million in October. The monthly increase comes after six consecutive months of declines. Sales activity increased across three out of the four major regions last month.

However, sales declined 5.1% from the year-ago figure of 5.5 million. But NAR’s chief economist Lawrence Yun thinks higher housing inventory enticed more buyers to enter the market. Yun added that as inventory grows at the start of winter, price increases have begun to decelerate. This may result in “less frenzied buying conditions,” he feels.

Single-Family Starts Decline in October

However, the sector is still grappling with multiple challenges at this point. In October, housing starts increased 1.5% to a seasonally adjusted annual rate of 1.23 million. However, this represents a 2.9% yearly decline. Further, building permits declined 0.6% to 1.26 million.

More significantly, the monthly increase in housing starts was propelled by a surge in multifamily starts. This relatively volatile category, comprising condominiums and apartment buildings experienced a 1.3% increase to hit an annual pace of 363,000. However, single-family starts declined 1.8% to 865,000.

Single-family starts are a more closely watched category because they are usually constructed for purchase and not for rental purposes. A spurt in this metric is a sign that confidence in the economy is increasing and buyers are finding it easier to finance their housing purchases.

Homebuilder Confidence Hits Lowest Level in More Than 2 Years

Homebuilder confidence declined 8 points to 60 in November, per the National Association of Home Builders/Wells Fargo Housing Market Index. This is the lowest level since 59 recorded in August 2016. The eight-point decline is the biggest monthly fall since a 10-point drop recorded in February 2014.

The fact that the housing market in the United States has been suffering for a while now despite robust economic growth finally showed up in this report. Shares of major homebuilders have been taking a hit for quite some time now. (Read: Homebuilder Confidence Hits 2-Year Low: Rising Costs Pinch)

Over the past three months, shares of William Lyon Homes (WLH - Free Report) , KB Home (KBH - Free Report) , D.R. Horton, Inc (DHI - Free Report) , Lennar Corporation (LEN - Free Report) and Toll Brothers, Inc. (TOL - Free Report) have declined 40.9%, 18.6%, 21.7%, 18.6% and 15.1%, respectively. Each of the above stocks carries a Zack Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Conclusion

The U.S. housing sector has been facing difficult conditions for some time now. But demand has remained robust even as buyers are faced with a supply crunch, which has sent prices soaring.

However, October’s existing sales report provides new hope to the sector. Stabilization of trends seems to be in progress, which could be followed by a modest recovery.

Experts feel that homebuilder stocks have attractive valuations, which already account for the current conditions. Some of these with strong fundamentals could make strong additions to your portfolio in the months ahead.

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