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Builders Confidence Up in May: Signs of Revival in Housing?

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U.S. homebuilders turned out to be optimistic about housing prospects on low interest rates, withdrawal of stay-at-home orders, rising mortgage applications and gradually increasing buyer traffic. However, high unemployment and supply-side challenges like builder loan access and material availability still remain pressing concerns.

Confidence Rebounds From Historic Lows

Despite being hurt significantly in the busiest housing season, builders’ prospects started improving in May, as evident from the latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI).

Per the latest news released on May 18, confidence level of single-family builders rose seven points to 37 from April’s historic low reading of 30. In April, the metric plummeted a significant 42 points from March.

All the three indices surged in May. The indicator that gauges present sales conditions grew six points to 42 from last month. Prospective buyer traffic rose eight points to 21 and sales predictions for the next six months increased10 points to 46.

The three-month moving averages for the regional HMI reading were also up in Midwest, South and West. Midwest grew seven points to 32, Southrose eight points to 42 and West gained12points to 44 from the prior-month figures. However, Northeast fell two points from the prior month to 17.

Improved Order Trend on New Business Model Renews Hope

The novel coronavirus has created many challenges for builders as well as buyers. In March, when states and local government bodies implemented stay-at-home orders, market pundits anticipated a U.S. recession by the second quarter of 2020. As buyers were not able to step out of their residence and builders were restricted to construct homes in certain areas, the market fell dramatically.

Nonetheless, the industry has started rebounding in recent times. Record lower mortgage rates, 3.28% reported on May 14, recent weeks of gains in mortgage loan application volume per latest data from the Mortgage Bankers Association, and loosening restrictions on building homes boosted buyer traffic. This can be seen in the chart below:

The Zacks Building Products - Home Builders industry has improved 34% in a month compared with the Zacks Construction sector and S&P 500 composite’s 15.6% and 1.7% rally, respectively.

The new business model — which focuses more on buyers’ need for the time being, i.e. knowledge and access to the homes they are seeking — is encouraging. Builders are now more focused on increasing engagements through social media, virtual tours and online closings.

Encouragingly, Meritage Homes Corporation (MTH - Free Report) recently announced that sales momentum increased in the last two weeks of April. The increase in traffic and orders continued in May, and it expects orders to be in line with the prior-year period. Impressively, Meritage Homes enables its buyers to shop online, see homes available for quick move-in, and get pre-qualified and virtual tours of communities.

In addition, cost of goods used in residential construction decreased 4.1% in April — the largest monthly decline — per the latest Producer Price Index report released by the Bureau of Labor Statistics.

However, we cannot ignore the challenges that are prevalent in the construction industry. These include availability of loans for homebuilders and building materials. Also, a significant rise in unemployment, particularly arising from coronavirus-led shutdowns and stay-at-home orders, has added to the woes.

The recent Bureau of Labor Statistics Job Openings and Labor Turnover Survey data reveals that there were 618,000 layoffs in the construction sector in March. The metric was strikingly high from 202,000 in February and 179,000 in March 2019. Notably, it expects the metric to be higher in the April data scheduled to be released in June 9.

Although these headwinds create challenges for the industry, increased demand for housing and a lack of inventory lead to market opportunities for single-family builders. Currently, we are unable to gauge the exact impact of the pandemic on the housing market. Yet, the recent market data depicting positive sentiments is impressive.

Shares of KB Home (KBH - Free Report) , PulteGroup, Inc. (PHM - Free Report) , Toll Brothers, Inc. (TOL - Free Report) , Lennar Corporation (LEN), NVR, Inc. (NVR - Free Report) and D.R. Horton, Inc. (DHI - Free Report) have surged 15.9%, 12.3%, 11.8%, 11.8%, 10.9% and 10%, respectively, on May 18, post the news release.

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