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Homebuilder sentiment leaps in June

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NAHB Homebuilder Sentiment IndexThe 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 them to characterize them 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 8 in early 2009. While the index has been steadily rising in the years since it bottomed, it has recently been slowing down. Until this month.

Homebuilders are net positive for the first time since the bubble.

The index came in at 52, the highest reading since April 2006, and the first time since the bust that more homebuilders considered conditions to be “good” than “poor.” The eight-point increase was the highest since 2002.

Given the strength of first quarter earnings, this report is not 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.

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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 – traffic, current sales expectations, and future sales expectations – all rose.  The South and the Midwest reported the biggest gains, while the Northeast eased up slightly and the West Coast fell slightly.

Implications for the home builders

The homebuilders are in a better position than the smallest construction firms in that they do have easy access to credit. Last fall, Toll Brothers (TOL) priced a senior convertible bond offering on amazingly easy terms – 50 basis point coupon, conversion premium of 50% and 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.

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 is some real pent-up demand that will become unleashed 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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