Housing Starts Up in March, Permits Decline - Analyst Blog

As the winter chill subsides, builders are preparing for the upcoming spring selling season.  They are increasing their inventory of homes, anticipating a relatively strong spring buying season. A slew of data released recently on new home constructions shows that the housing sector is gearing up for the spring selling season.

As per data provided by the U.S. Department of Housing and Urban Development and the U.S. Census Bureau, nationwide housing construction increased 2.8% from Feb to a seasonally adjusted annual rate of 946,000 units in March. Housing construction recovered the most in the Northeast and Midwest as these regions recovered from the harsh winter.

Regionally, the combined housing production data was mixed in March. Housing production increased 65.5% in Midwest and 30.7% in the Northeast.  On the other hand, housing production declined 9.1% in South and 4.5% in the West.

The data also showed that single-family housing starts increased 6% to 635,000 units, whereas multifamily starts declined 6.1% to 292,000 units.

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

KB Home KBH, which released its earnings for first quarter 2014 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. The company expects a strong spring selling season.

Another home building company, Lennar Corp. LEN, which released its earnings in the same week as KB Home, witnessed a 0.7% sequential quarterly decline in order growth due to a harsh winter. However, the company expects the scenario to improve this spring. The company witnessed a sequential monthly improvement in traffic and new orders during the quarter.

Moreover, The National Association of Home Builders (NAHB) expects 2014 to be a strong year, with gradual improvement in the housing sector. Homebuilder confidence, as indicated by the National Association of Home Builders (NAHB)/Wells Fargo housing market index, remained stable at 47 in April from March. However, builders improved sales as demand picks once the spring selling season gets into full swing.

However, tight credit conditions and a volatile job market are expected to remain concerns. In fact, homebuilders remain concerned about the shortage of lots and skilled labor, and rising cost of materials.

In fact, this concern is also reflected in recently released building permit data. Released in Apr 2014, the data shows that issuance of new building permits decreased 2.4% in March. However, it may be noted that the Northeast and Midwest posted double-digit increase in permit issuance. The number of permit issuance remained unchanged in the West whereas it declined in the South.   

Both KB Home and Lennar Corp. carry a Zacks Rank #3 (Hold). However, two better-ranked homebuilding companies include William Lyon Homes WLH, sporting a Zacks Rank #1 (Strong Buy) and Taylor Morrison Home Corporation TMHC, sporting a Zacks Rank #2 (Buy).