Why U.S. Homebuilders Are Pushing Towards Highs

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Includes: DHI, HD, ITB, LEN, PHM, TOL
by: Andrew Sachais
Summary

U.S. home prices rose in recent months.

Meanwhile, home sales are also improving.

With low mortgage rates, and a firming labor market, U.S. home building companies stand to benefit in coming months.

As the housing industry recovers from the financial crisis, optimism is slowly improving among homebuilding stocks, pushing prices higher. iShares Dow Jones US Home Construction (BATS:ITB) is pushing towards multi-year highs above 27, as is seen in the chart below. iShares Dow Jones US Home Construction is most heavily weighted by DR Horton (NYSE:DHI), Lennar (NYSE:LEN), PulteGroup (NYSE:PHM), Toll Brothers (NYSE:TOL), and Home Depot (NYSE:HD).

Data provided by Stock Charts

U.S. median home prices rose in December, signaling steady demand in the housing market. The median home price figure grew by an 8.2% annual pace on the month, above the previous month's reading of 5.2%. The chart below is of both headline median home prices, as well as the annual pace of change in the indicator. While home prices have steadily grown since 2010, it has declined from its peak rate of nearly 18% in July 2013. A stronger jobs market and low mortgage rates are cited as responsible for the rise in home prices recently.

"A stronger job market, as well as mortgage rates at close to historic lows contributed to faster appreciation at a time when inventory is limited. The price gains are reducing affordability in areas across the U.S., which had 25% growth on average over the past three years," Lawrence Yun, chief economist for the Realtors group, told Bloomberg.

Data provided by the Federal Reserve

Meanwhile, U.S. home sales also accelerated higher alongside rising prices. In December, the home sales figure grew by an annual pace of 2.7%, relatively unchanged from the previous month's reading of 2.8%. The chart below is of both total new home sales, as well as the annual rate of change in the indicator. While home sales are still growing, the pace of change has fallen back from highs experienced in summer 2013. Moreover, the headline new home figure is well below levels seen in 2005, which is mainly due to the drastic decline in the level of household mortgage debt.

Data provided by the Federal Reserve

Lastly, low U.S. mortgage rates have made financing new homes cheaper, which is aiding in home purchases in the aftermath of the financial crisis. In January, the 30-year mortgage rate came in at an annual pace of -14%, below the previous month's reading of -11%. The chart below is of the headline 30-year mortgage rate, as well as the annual pace of change in the figure.

Mortgage rates drastically declined during the financial crisis as the Federal Reserve slashed its benchmark lending rate. In 2013, when the Fed hinted at raising rates, mortgage rates subsequently spiked broadly higher. Over the last year, however, the mortgage rate steadily fell back down. With low global inflation, and many investors piling funds into U.S. bonds, yields remained low, suppressing the 30-year mortgage rate.

In coming months, the labor market is expected to further improve, increasing real wages, while mortgage rates look to remain low. With both home buying and prices continuing to rise, the U.S. housing market is firming. U.S. home building stocks should continue to benefit, increasing margins and share prices in coming months.

Data provided by the Federal Reserve

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.