Latest Homebuilder Measure Offers A Reason To Believe

| About: SPDR Homebuilders (XHB)

Summary

Homebuilder sentiment topped out in October, and after edging down into February, it has remained at the same level for four straight months.

We have documented the reason for followers, believing it to be due to a negative feedback loop that led stock market decline to impact consumer behavior in early 2016.

However, there have been "green shoots" since, with April data including that for Retail Sales last week and Leading Economic Indicators Thursday, both showing healthy growth.

Even within this seemingly stagnant report on homebuilder sentiment, builders indicated much-improved expectations for the next six months' sales activity.

I believe it all adds up to a healthy growth outlook for housing.

Homebuilder sentiment was measured this week and it showed that while builders are generally feeling positive about their sector, they are not as giddy as they were a few months back. So what does the Housing Market Index say for real estate?

The National Association of Home Builders (NAHB) published its Housing Market Index (HMI) this week. The HMI was unchanged at 58 in May (50 marks neutral sentiment), but that is the position it has held for four straight months now. The index marked its high last October at 64, and has inched down since then and into February, where it first struck 58.

You will recall that we ran into some soft economic data in the first fourth of the year. Housing data was not excluded from that. Investors were extremely concerned when Existing Home Sales data dropped sharply in February, but we saw an anomaly and reported it to real estate investors at the time. Housing weakness was accompanied by a slip in auto sales and retail sales, all of which we attributed to a negative feedback loop.

The extreme volatility in the stock market through the first two months of the year likely impacted economic activity and data through March. However, we are starting to see the improvement we have been looking for in April, most notably via the superb Retail Sales gain. Thursday, we also received the strongest Leading Economic Indicator (LEI) data we have seen in one full year, with LEI up 0.6% in April (it grew 0.7% in April 2015).

While the Housing Market Index stuck at 58, there was a sign that builders are looking forward to better days ahead. The HMI component index that measures sales expectations for the next six months improved by three points to a healthy mark of 65. Builders are seeing the benefits of low unemployment, low mortgage rates and pent-up demand, according to NAHB Chief Economist Robert Dietz. I'm also sure they are seeing the benefit of more confident consumers since the stock market and the values of their individual investment portfolios have recovered.

NAHB members also report on their views of current sales conditions and buyer traffic. The current state of affairs was reported steady at 63, the reading of the component measure for sales conditions. Buyer traffic has been relatively low for as long as I have been following the data, I believe due to misguided expectations builders may have for prospective home buyers. This month's reading for buyer traffic was steady at a mark of 44.

The NAHB reports its regional data on a 3-month moving average basis, so it includes April and March but excludes February. It showed the South and Midwest improved by a point each, to 59 and 58, respectively. The West region was unchanged at 67, but the Northeast declined by 3 points to 41. Regionally speaking, I found data was poorest in the Northeast and Midwest in February, I believe due to their geographical proximity to financial markets. Think about the concentration of employment tied to or related to the financial markets in New York and Chicago.

The shares of major homebuilders have come under stress this week, since the Fed meeting minutes release Wednesday, May 17. It is due to their cyclical nature and the importance of mortgage rates to housing. But for as long as the economy is growing and creating jobs and wealth, the real estate sector can sustain gradually increasing mortgage rates.

Housing Relative Shares

05-17 to 05-19 Close

SPDR S&P Homebuilders (NYSE: XHB)

-0.5%

PulteGroup (NYSE: PHM)

-2.1%

D.R. Horton (NYSE: DHI)

-0.7%

KB Home (NYSE: KBH)

-0.8%

Toll Brothers (NYSE: TOL)

-0.4%

Hovnanian (NYSE: HOV)

+0.6%

Lennar (NYSE: LEN)

-0.8%

Click to enlarge

The good news is that housing is also improving here in the second quarter. You no longer have to take my word for it, as the data is proving true as well. I cover real estate closely and invite relative investors to follow my financial column here at Seeking Alpha.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.