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Builder Confidence Slipped in December 2015

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Homebuilder confidence

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

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 index peaked at 71 during the height of the housing bubble in late 2005. It bottomed out at eight in early 2009. While the index has been increasing steadily in the years since it hit bottom, it has recently started to accelerate at a faster rate.

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Homebuilder sentiment remains good

In December, the NAHB Wells Fargo Housing Market Index came in at 61, a decrease of one point from November—just off the highest levels since late 2005. Right now builders are in a good position because inventory is tight. Lennar Corporation (LEN) reported good numbers in its most recent quarter, and we’re also seeing merger and acquisition activity in the sector.

Meanwhile, we’ve been waiting for first-time homebuyers to get back in the market for quite some time. Note that both D.R. Horton (DHI) and PulteGroup (PHM) have been directing more resources toward building entry-level homes. These homes are cheaper and have lower margins.

Implications for homebuilders

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

Investors who are interested getting broad-based exposure to the homebuilding sector should look at the SPDR S&P Homebuilders ETF (XHB). This sector has been outperforming the S&P 500, which you can access via the S&P 500 SPDR ETF (SPY).

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