New Home Sales Dip in February - Analyst Blog

Recent home sales data released by the U.S. Department of Housing and Urban Development and the U.S. Census Bureau showed that sales of newly-built single-family homes dipped 3.3% to 440,000 units in Feb 2014 as unfavorable weather decelerated sales of new homes.

Regionally, February new home sales data were weak in the windswept regions of the Northeast, South and the West. New housing sales witnessed a decrease of 32.4% in Northeast, 1.5% in South and 15.9% in West. On the other hand, The Midwest regions witnessed 36.7% increase in new home sales compared to the January figure.

However, the inventory of new homes ramped up to 189,000 units in Feb (ensuring a 5.2 month supply given the current sale pace) as homebuilders still anticipate a strong spring buying season. In fact, National Association of Home Builders expects 2014 to be a strong year, with the weather improving after the first two months of the year.

In fact, some homebuilder who recently released their first quarter results are also optimistic for a strong spring selling season.

KB Home KBH, whose earnings results for first quarter 2014 were released on Mar 19, increased its inventory level 14.3% year over year, driven by aggressive land investments made in the past quarters. The aggressive land investments also resulted in a turnaround in order growth for the company. As such, the company expects strong spring selling season.

Another home building company, Lennar Corp. LEN, which released its earnings in the same week, witnessed a 0.7% sequential quarterly decline in order growth. Despite a year-over-year increase in order and number of homes delivered, sales and construction of homes were affected by harsh weather. However, the company expects a strong spring selling season in 2014 as it has been witnessing a sequential monthly improvement in traffic and new orders.

The weak new home sales data in February reflects the impact of harsh weather. However, the spring selling season and the upcoming quarter are expected to be encouraging on the back of favorable mortgage rates, affordable prices and the release of pent up demand. Most companies are increasing their inventory level to meet the expected increased demand for new homes.

While KB Home carries a Zacks Rank #3 (Hold), Lennar carries a Zacks Rank #2 (Buy). Some better-ranked stocks in the homebuilding sector include William Lyon Homes WLH and Taylor Morrison Home Corp. TMHC both sporting a Zacks Rank #1 (Strong Buy).