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Homebuilder Confidence Rises in May: Is the Worst Over?

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Homebuilder sentiment bounced back in May, signaling that the worst of the economic downturn is probably over. According to the National Association of Home Builders (NAHB) , confidence in the market for single-family homebuilders saw an uptick after the steepest-ever, one-month decline in April.

The coronavirus pandemic has battered the global economy and almost all industries have been deeply impacted. With millions losing jobs over the past few weeks, finance has been a major problem. This has directly impacted the homebuilder market, with few Americans buying homes. However, following the improvement in sentiment, shares of major homebuilder rallied on May 18.

Homebuilder Sentiment Bounces Back

The NAHB housing market index has climbed seven points to 37 this month after a record plunge in April. Anything above 50 is considered positive. So, the sentiment remains in negative territory. The index stood at 66 in May 2019 and hit a high of 76 in December.

All the other components of the index also rose in May but remain in negative territory. Current sales conditions increased six points to 42, while sales expectations for the next six months jumped 10 points to 46 and buyer traffic rose eight points to 21.

The seven-point jump in May is a positive sign given that homebuilder sentiment plummeted to an unprecedented 42 points in April, as the coronavirus-led lockdown brought businesses to a standstill. Although homebuilding continued during this period, a pullback was noticed in new home purchases.

Other Factors Helping Demand

Coronavirus resulted in record job losses in April, and a collapse in manufacturing output and retail sales. People backed out from buying homes as they feared blocking their money by investing in property. However, the rebound in homebuilder sentiment is an indication that buyers are showing interest with the U.S. economy gradually reopening up people going back to work.

Following the latest data, shares of major players rallied on May 18. Meritage Homes Corporation (MTH - Free Report) , PulteGroup, Inc. (PHM - Free Report) and KB Home (KBH - Free Report) stocks gained 13.7%, 12.3% and 15.9%, respectively.

Shares of D.R. Horton, Inc. (DHI - Free Report) and Lennar Corporation (LEN - Free Report) jumped 10% and 11.8%, respectively. Also, shares of NVR, Inc. (NVR - Free Report) gained 10.9%. D.R. Horton, Lennar Corporation and NVR, each carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

According to many homebuilders, buyers have once again started showing interest in purchasing homes. CEO’s of many builders during their recent earning call reported an increase in buyer demand. Also, mortgage applications for buying homes rose for four straight weeks, even as broader macroeconomic concerns linger due to unprecedented job losses in recent months.

Moreover, homebuilders believe that home buying activity will bounce back, particularly because mortgage rates have fallen to record lows as the Federal Reserve has pumped cash into the economy to lower rates as part of its efforts to stimulate economic activity in the face of the novel coronavirus outbreak. 

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