Hurray for Homebuilders? Not Quite Yet, But Housing Market Gaining Momentum

Much like the early appearance of this spring’s first crocuses and tulips, signs of life in the long-slumbering housing market are starting to pop up. Construction economists are hesitant to say the homebuilding recovery is here to stay, because the momentum is just building and very regional in nature.

But more positive economic reports and mildly bullish action with the stocks of some publicly owned homebuilders do point toward a market on the mend. That’s good news for the electrical wholesaling industry because the residential market accounts for an estimated 17% of all electrical products sold through electrical distributors, according to Electrical Wholesaling sales forecast data. As the year progresses be sure to check Electrical Marketing for the latest data and analysis on the following market indicators.

Building permits. While the January data from the Department of Commerce for total building permits was only up 0.7% over Dec. 2011 to 676,000, it’s the seventh month in a row the number of single-family building permits, which the National Association of Home Builders (NAHB), Washington, D.C., says can be an indicator of future construction activity, have increased. January’s total building permits were up an impressive 19% YTY over Jan. 2011. Multi-family permits have kept a faster pace than single-family starts over the past year and kept up their torrid pace, clocking a 61% YTY increase over Jan. 2011. The strongest region is the South, which was up 30.1% YTY for total building permits and 13% for single-family building permits.

Housing starts. The most recent NAHB response to January housing data from the Department of Commerce was the housing association’s most cheerful report in many months. Said Barry Rutenberg, NAHB’s chairman and a home builder from Gainesville, Fla. “(The) solid housing starts report indicates that builders are putting more of their crews back to work, and adds to the growing field of evidence that the overall housing market is gradually but consistently moving in the right direction.”

Added NAHB Chief Economist David Crowe, “The fact that the three-month moving average for housing starts has now increased for nine consecutive months and is approaching the 700,000 mark for the first time since Oct. 2008 is indicative of a solid recovery in housing activity stemming from recent firming in employment and consumer confidence measures.

“That said, housing production is still far from what would be considered normal in a healthy market, and many challenges remain for homebuilders in terms of tight credit conditions, difficult appraisals and the continued flow of foreclosed properties on the market — all of which are certainly slowing the pace of improvement in both housing and the overall economy.”

Pending home sales. Lawrence Yun, chief economist for the National Association of Realtors (NAR), Washington, D.C., also sees some positive momentum in home sales and said in a NAR press release that it’s a promising indicator going into the spring home-buying season. “Given more favorable housing market conditions, the trend in contract activity implies we are on track for a more meaningful sales gain this year. With a sustained downtrend in unsold inventory, this would bring about a broad price stabilization or even modest national price growth, of course with local variations.”

Yun said in the press release that NAR’s pending home sales data, a forward-looking indicator based on contract signings, is up 8% since Jan. 2011 and is now at the highest level since April 2010, when buyers were rushing to take advantage of the home buyer tax credit.

“Movements in the index have been uneven, reflecting the headwinds of tight credit, but job gains, high affordability and rising rents are hopefully pushing the market into what appears to be a sustained housing recovery,” Yun said. “If and when credit availability conditions return to normal, home sales will likely get a 15 percent boost, speed up the home-price recovery, and thereby significantly reduce the number of homeowners who are underwater.”

Stock prices of publicly-held homebuilders. You don’t need to be a Wall Street whiz-kid to know that investing in homebuilders’ stocks was a pretty dicey situation over the past few years. But since the beginning of 2012, many of these stocks have offered more-than respectable returns that, while they won’t make investors think they are back to the glory days during the 2005-2007 housing boom, are still up well over 10%. The homebuilders currently enjoying the biggest increases in their stock prices since the beginning of this year are Hovnanian Enterprises (+60.5%); KB Home (+59.5%); M.D.C. Holdings (+32.3%); and Beazer Homes USA (+22.1%). Check out the stock chart on this page for information on other publicly held homebuilders.

Home equity. It’s not all good news in the housing market. An article this week in the Wall Street Journal said homeowners now have an estimated $715 billion in “underwater” mortgages where the loan is larger than the value of the residential property, pushing the homeowner into a negative-equity investment. The article said data from CoreLogic, a mortgage-data firm, shows that 11.1 million homeowners had an underwater mortgage in the fourth quarter — 22.8% of all residential properties with a mortgage. The share has not come down much since the recovery started in 2009, according to the article. Many housing economists say until house prices increase and more homeowners can make money on the sales of their homes, negative equity will tamp down any dramatic recovery in housing.

A posting on www.investopedia.com by Matthew McCall in reaction to NAR’s most recent data on pending home sales did a nice job summarizing the current situation in the housing market. “It’s true the number of homes sold in 2011 is still well below what many experts believe is considered a healthy home market; the good news is that the trend is improving. This bottoming pattern is what I will call the bottom of the national housing market. Or at worst, a level at which the downside is limited and the upside outweighs the downside risk.”