Why Real Estate Investors Should Not Fret The Slip In Builder Mood

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Includes: DHI, HD, KBH, LEN, PHM, SPY, TOL, XHB
by: Markos Kaminis

Summary

The latest measure of home builder sentiment slipped in July.

Builders mentioned rising materials costs as problematic to housing affordability.

Recent U.S. dollar softness, relatively speaking, probably caused that, along with improved demand for materials.

Foreign demand for U.S. homes may be precluded by the still relatively strong U.S. dollar, but mending economies and currency in Europe should help.

Look for U.S. economic gains, and builders' efforts to balance the current housing inventory shortage, to enthuse builders moving forward.

The National Association of Home Builders (NAHB) published its monthly measure of builder sentiment yesterday. The Housing Market Index (NYSE:HMI) slipped a bit in its latest reading. However, I suggest sector investors not fret, as I see the mood improving moving forward. Here's why:

Housing Securities 07-18-17
SPDR S&P 500 (NYSE: SPY) +0.04%
SPDR S&P Homebuilders (NYSE: XHB) -0.6%
ProShares Ultra Homebuilders & Supplies (NYSE: XBU) -1.0%
PulteGroup (NYSE: PHM) -0.8%
D.R. Horton (NYSE: DHI) -0.7%
K.B. Home (NYSE: KBH) -1.3%
Toll Brothers (NYSE: TOL) -1.8%
Lennar (NYSE: LEN) -1.2%
Home Depot (NYSE: HD) -1.1%

The NAHB's Housing Market Index (HMI) decreased two points to a still solid mark of 64 for July, down from a revised reading of 66 for June (revised from 67). Economists expected the HMI to rise this month to 68, so the data was disappointing. In fact, this was the lowest reading since November of 2016, when confidence was low all around near election day.

The recently declining dollar and strong demand for materials seems to have home builders worried about rising materials costs. The Chairman of the NAHB, Granger MacDonald, stated as much, noting higher lumber prices as a key concern. He went on to explain that rising costs hurt housing affordability, while noting still strong consumer interest in new homes.

The component index measuring buyer traffic gives reason to question the Chairman's perspective. It fell by a point to a mark of 48. Measures below 50 indicate more builders view buyer traffic as negative than positive.

Still, the builder perspective for current sales and future sales remains stellar. The component index for current sales conditions slipped two points to a still strong level of 70. The expectations index, looking at sales 6-months out, also fell by two points to a very positive 73.

Three-month moving average measures of regional activity show strength across most of the nation, save for the existing-home saturated market of the Northeast. In the Northeast, builders gave the mood a sub-par mark of 47, though it improved by a point this month. The West was best, easing by one point to 75. The South slipped three points to a reading of 67, and the Midwest edged lower by a point to 66.

Economic data was questionable in the first quarter, and housing data still offered reason for skepticism into the second. However, there are reasons to be positive for housing here. Demand is strong and rising, with the labor market at full employment. Economists expect GDP to be better in Q2, and I expect it to be much improved as we move deeper into the year. Consumer spending should benefit, and builders will be producing homes to fix the current inventory deficiency; that should help with affordability.

The strong dollar is perhaps working against foreigners. However, economies in Europe are on the mend, as is the euro. I expect Asia to come around as well shortly. While the U.S. dollar should hold support here in my view, better economies overseas should increasingly compensate for any forex barrier.

The most important factor for housing is the U.S. economy, and I expect it will increasingly show us via data that it is humming. Home builders hung up on headlines telling of trouble with tax reform and health care legislation should see improved moods when tax reform legislation is approved this year or next. We should not ignore current economic health due to delayed future freed cash flow.

The biggest obstacle to the real estate market is rising interest rates, currently unapparent. As the economy gains ground, long-term rates will rise. That will be the complaint you see registered by NAHB members in a few months, in my view, even while home sales surge on economic expansion. For my regular views on housing, readers are welcome to follow the 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.