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July Housing Starts, Permits, and Sentiment

PART:
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Part 3
July Housing Starts, Permits, and Sentiment PART 3 OF 3

Homebuilder Sentiment Improved in August

Homebuilder confidence

The NAHB (National Association of Home Builders) Wells Fargo Housing Market Index measures builder confidence. It gauges how builders view current and future sales of single-family residences. It asks builders to characterize sales as “good,” “fair,” or “poor.”

Homebuilder Sentiment Improved in August

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The index also asks builders to rate prospective buyer traffic as “high to very high,” “average,” or “low to very low.” An index level of 50 is considered neutral.

The NAHB Wells Fargo Housing Market Index peaked at 71 during the height of the housing bubble in late 2005. It bottomed out at 8 in early 2009. The index has been increasing steadily over the years since it hit rock bottom. Recently, it has started to accelerate.

Homebuilder sentiment is good

In August, the NAHB Wells Fargo Housing Market Index came in at 60, up a point from July. Homebuilder sentiment peaked in the fall of 2015. Right now, builders are in a good position because inventory is tight. Lennar (LEN) reported good numbers in its most recent quarter. We’re also seeing mergers and acquisitions in the sector.

Meanwhile, we’ve been waiting for first-time homebuyers to get back in the market. In the existing sales report, the National Association of Realtors noted that the percentage of first-time homebuyers increased to 33% in June. Note that both D.R. Horton (DHI) and PulteGroup (PHM) have been directing more resources toward building entry-level homes. These homes are less expensive and have lower margins.

Implications for homebuilders

The high end of the market, as evidenced by Toll Brothers (TOL) and Lennar, has been doing well since the market bottomed out in 2012. The Federal Reserve’s policy of quantitative easing increased asset prices, as well, creating a wealth effect at the top end of the price range. Thus, the sector is continuing to perform well.

Investors who are interested in getting broad-based exposure to the homebuilding sector can look at the SPDR S&P Homebuilders ETF (XHB).

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