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Homebuilder sentiment sets another post-bubble record in June, positive outlook

NAHB Housing Market IndexEnlarge GraphThe National Association of Homebuilder Sentiment Index is a closely watched measure of future building activity

The National Association of Homebuilders Sentiment Index measures the confidence of homebuilders. It gauges builder perceptions of current and future sales of single-family residences and asks builders to characterize the sales as “good,” “fair,” or “poor.”  It also asks the builders to rate the traffic of prospective buyers as “high to very high,” “average,” and “low to very low.”

An index level of 50 is considered neutral. The index peaked at 71 during the height of the housing bubble—late 2005—and bottomed at eight in early 2009. While the index has been steadily rising in the years since it bottomed, it has begun to accelerate

Homebuilders are net positive for the second time since the bubble

The index came in at 57, the highest reading since January 2006, and only the second time since the bust that more homebuilders considered conditions to be more “good” than “poor.”

Given the strength of first quarter earnings, this report isn’t a surprise. Lennar (LEN), Toll Brothers (TOL), Ryland (RYL), and Meritage (MTH) all reported strong earnings. The NAHB is forecasting a 29% increase in housing starts this year.

Shortages of skilled labor have been a problem for the homebuilding industry as well as the mortgage industry. Since the bubble burst, employment in these sectors dropped so dramatically that many skilled workers found jobs in other sectors of the economy. Skilled construction workers were absorbed by the energy sector and trucking.

All three components rose—traffic, current sales expectations, and future sales expectations. The South and the Midwest reported the biggest gains, while the Northeast and the West Coast increased slightly.

Implications for homebuilders

The homebuilders are in a better position than the smallest construction firms in that they have easy access to credit. Last fall, Toll Brothers (TOL) priced a senior convertible bond offering on amazingly easy terms—a 50 basis point coupon, a conversion premium of 50%, and a 20-year maturity. Those terms were unheard of—even in the go-go credit days of the housing bubble, no one was issuing 20-year paper with a negligible coupon at a 50% conversion premium.

So far, it appears that the rise in interest rates is having no negative effects on new home demand. KB Home mentioned on its earnings conference call that buyers were exhibiting a sense of urgency now that home prices and rates are increasing. This report echoes that observation.

The increase in consumer sentiment is starting to drive more business for the homebuilders. Housing starts have been so low for so long that there’s some real pent-up demand that will unleash as the economy improves. The Homebuilder ETF (XHB) rallied on the news. As the job market improves, the first-time homebuyer should re-appear, which would create a wind at the back of the homebuilders.

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