The housing market is supposed to be doing better and the lack of a new recession is supposed to have helped to put in a floor under what had been consistently falling house prices. Even the sub-prime activity is supposedly getting a bit more interest. So why did homebuilder confidence take an unexpected dive in April?
The National Association of Home Builders reported that home builder confidence dropped to 25 from the prior month’s reading of 28 and that marked the first drop in seven months. Dow Jones was calling for a reading of 28 and Bloomberg was calling for a 1 point gain to 29 in April.
Here is where the problem is: the stronger interest from consumers has not matured into many more deals closing. Buyers are still having trouble closing on a mortgage and some buyers are opting out ahead of a deal closing. Investors also need to be aware that it takes a reading of 50 before the general consensus is that housing is considered favorable versus cautious and we are now going on six-years of the negative readings.
Lennar Corp. (NYSE: LEN) is down 1.6% at $25.69; KB Home (NYSE: KBH) is down 1.3% at $7.95; DR Horton Inc. (NYSE: DHI) is down 1.2% at $14.66; and PulteGroup, Inc. (NYSE: PHM) is down 1.3% at $8.43. Toll Brothers Inc. (NYSE: TOL) is today’s standout stock with a gain of 2.5% at $23.51.
There is another problem here with the reading in that all three components of the index were lower. Traffic was ratcheted down, as was current sales and future sales expectations. Today’s news does need to be segregated from the entire housing market. Builders are competing with existing home sales and with foreclosures or other distressed housing sales.
Mortgage rates are still close to record lows. That cannot last forever and at some point you would have to ask what happens to the affordability if the 30-year mortgage rates rose 100 or 150 basis points.
To prove that the housing market may be fragmented despite the drop in builder sentiment, take a look at the retail segment: The Home Depot, Inc. (NYSE: HD) is up almost 1% at $51.45 and it hit a 52-week high of $51.80 today. Lowe’s Companies, Inc. (NYSE: LOW) is up 0.7% at $31.90 and shares also hit a new year high as well.
Builders may be pessimistic, but they are competing with the existing home sales perhaps harder than ever now.
JON C. OGG