Market Overview

Home Builder Confidence is Climbing Rapidly

According to a recent survey, the confidence of American home builders has risen to the highest level seen since 2007. The National Association of Home Builders/Wells Fargo index of home builder confidence was up for the fifth month in a row, climbing to 29 in February, up from 25 a month earlier. While new home sales account for a fraction of overall home sales, they are considered important because of the number of jobs that the construction of a new home creates.

Although the survey revealed that home builders are becoming less pessimistic about the housing market, it's also worth noting that any score below 50 is considered to be negative. Still, the fact that the home builder confidence level has more than doubled since September of last year is seen as a positive trend by many people in the home building industry. Factors that are said to contribute to the improved outlook of home builders include historically low mortgage rates, lower home prices and an improving economic outlook.

However, there are also a number of factors that are keeping the home builders' confidence level below the breakthrough point of 50. Lenders have tightened lending requirements and raised minimum down payment requirements, making it more difficult for prospective buyers to purchase new homes. Home builders are also competing with the staggering amount of home foreclosures from the past several years that have helped drive down the purchase price of new homes.

Some observers don't find the National Association of Home Builders/Wells Fargo index to be particularly insightful because the dramatic rise in home builder confidence that it reports is at odds actual new home sales statistics. The survey of home builders also seems to conflict with a just released report by the Mortgage Bankers Association, which showed that the number of mortgage applications filed in the United States last week had fallen 1 percent from the previous week's amount. The Mortgage Bankers Association also found that the share of mortgage applications that were filed to refinance existing mortgages was on the rise.

It's to early to tell but if the improved outlook of home builders turns out to be more than wishful thinking, the stock prices of companies like Meritage Homes Corporation (NYSE: MTH), Toll Brothers (NYSE: TOL) and Beazer Homes USA (NYSE: BZH) could all move higher over the next year.


ACTION ITEMS:

Bullish:
Traders who believe that the home builders survey is signaling that new home construction will be on the rise this year might want to consider the following trades:
  • Traders could buy the home builder stocks that were already mentioned or look into a home builder ETF. The SPDR S&P Homebuilders (NYSE: XHB) and the iShares Dow Jones US Home Construction (NYSE: ITB) ETFs both give investors exposure to a basket of home builder stocks.
Bearish:
Traders who believe that the survey is overly optimistic may consider alternative positions:
  • Shorting the stocks mentioned earlier in this article is worth consideration by traders who believe that the home construction business won't be improving any time soon.
Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

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