Learn How To Start Investing In Real Estate
Learn How To Start Investing In Real Estate

Homebuilder Confidence Provides Boost For Housing Sector

Written by Than Merrill

Some would argue that the last decade has seen more change in its time than the two that came before it combined, especially in regards to the real estate industry. Prices and home values have been polarizing, mortgage underwritings have drastically changed the loan process, and investor strategies have shifted towards buy and holds. However, changes in the market have certainly brought back something we haven’t seen for a while, or at least in the last decade: homebuilder confidence.

According to the National Association of Home Builders/Wells Fargo Housing Market Index, homebuilder sentiment increased three points at the start of October to a level of 64. That is an impressive 10 points ahead of where it was last year at this time, and an encouraging position to be in heading into the winter months.

“The fact that builder confidence has held in the 60s since June is proof that the single-family housing market is making lasting gains as more serious buyers come forward,” said NAHB Chairman Tom Woods, a homebuilder from Blue Springs, Missouri. “However, our members continue to tell us there are still pockets of softness in some markets across the nation, and that they face challenges regarding the availability of lots and labor.”

The National Association of Home Builders/Wells Fargo Housing Market Index has three components, two of which demonstrated a propensity for growth in early October. Both sales expectations and sales conditions improved, while buyer traffic failed to pull itself out of the negative territory.

Increasing seven points to 75, sales expectations over the next six months remain encouraging. Current sales conditions, on the other hand rose three points to 70 on the index. Buyer traffic, however, remained stagnant, and is currently sitting at 47 on the index. For clarification, anything less than 50 is less than ideal. Fortunately, gains in sales conditions and expectations were enough to compensate for a lack of buyer traffic.

From a regional perspective, the West registered the highest increase. Homebuilder confidence in the West jumped five points to 69, well ahead of the other regions. The Northeast, Midwest and South each rose one point to 47, 60 and 65, respectively.

Optimism doesn’t stop at confidence either, as the stocks of publicly traded companies within the industry encourage some experts – and rightfully so. From 1998 through last year, homebuilder stocks outperformed the S&P 500 between Nov. 21 and Feb. 6 by an average of 14 percent. According to Compass Point Research and Trading, a good portion of those years (12 out of 17) saw homebuilder stocks outperform the S&P by an average of 23 percent. However, those familiar with the market have suggested a return to prominence for lower price point builders.

“Lower price point builders have outperformed the sector on numerous verticals this year, and we believe this outperformance should continue as home builders are rewarded for strong volumes (externally and organically) in the market as credit expansion continues to play a big factor,” Compass Point analysts wrote in a report.

A recent announcement made by Fannie Mae has also contributed to the already budding homebuilder sentiment. The mortgage giant is set to release new tools specifically designed for lenders to “bring more certainty and simplicity” to the market, and to enhance borrowers access to credit. In a move that should make receiving a loan easier, more homebuyers are expected to join the ranks of homeowners.

“Our aim is to help lenders serve their customers efficiently so that more qualified borrowers have access to mortgage credit,” Fannie Mae CEO Timothy Mayopoulos said. “We are enhancing our offerings, improving our tools and innovating through the technology we provide to our customers. Our goal is to make sustainable homeownership a reality in communities across the country while reducing risk for taxpayers.”

If that wasn’t enough, Freddie Mac announced that it would be partnering with Quicken Loans to, “pilot several new initiatives aimed at helping provide more Americans the opportunity to achieve homeownership, while also building a smarter American mortgage finance system.”

It is no secret that access to credit has hampered many from achieving their dream of homeownership, but plans are in motion to change that. Now, perhaps more than ever, there is a consorted effort to get younger, first-time homeowners into the market, which bodes well for homebuilders.

As the end of 2015 is rapidly approaching, the homebuilder industry has benefited from a sort of perfect storm. Mortgage underwriters are making the process easier for buyers to receive a loan, homebuilder stocks are improving, and several indicators are working in favor of the industry. There is really nothing to suggest that homebuilder sentiment will not continue to increase in the coming months, and maybe even years.