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.”
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. The index has been increasing steadily in the years since it hit the bottom. Recently, it started to accelerate at a faster rate.
Homebuilder sentiment is good
In May, the NAHB Wells Fargo Housing Market Index came in at 58, unchanged from April. While it’s stuck at the lowest level in nine months, it’s still a good number. Right now, builders are in a good position because the inventory is tight. Lennar (LEN) reported good numbers in its most recent quarter. We’re also seeing M&A (mergers and acquisitions) activity 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 32% in April. It’s the highest since August and an increase of two percentage points from last year. 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, has been doing well since the market bottomed in 2012. The Fed’s policy of quantitative easing increased asset prices as well, creating a wealth effect at the top end of the pricing range. So the sector is continuing to perform well.
Investors who are interested in getting broad-based exposure to the homebuilding sector should look at the SPDR S&P Homebuilders ETF (XHB).