Homebuilder Confidence Contradicts Investor Sentiment

Includes: ITB, IYR, KME, REZ, XHB
by: Wall Street Strategies

By David Urani

Over the past month investors have brought up some serious questions over the state of the housing market, and consequentially there has been a pullback in the sector. Chief among the concerns has been a slide in weekly mortgage applications as mortgage rates have lifted; we would note that the decline in mortgage applications has been in refinances, however, rather than new purchases. In the meantime, the prospect of the Fed tapering off QE is creating concern that mortgage rates have more upside.

Today brought a piece of data that has the Street reconsidering its bearish tone on the industry. The NAHB/Wells Fargo Housing Market Index, a measure of homebuilder confidence, surged to a reading of 52 for June from 44 in May (well above the 45 consensus). That puts the index at its highest level since March 2006. The components also impressed, with present conditions going from 48 to 56, expected sales in the next six months going from 52 to 61, and traffic of prospective buyers going from 33 to 40.

In all it was a big surprise, and it also offers a strong endorsement for how the spring selling season has fared. This index also has a good correlation with housing starts, meaning it's likely the homebuilders have been active of late keeping inventories up amid dwindling supply of new homes.

The Dow Jones U.S. Home Construction index (a basket of homebuilding-related stocks) came off support around $460 last week, and was up a nice 2.5% today following the NAHB news. A month ago the index was trading at a high of $550, 10% above current levels.