Builder Confidence Dips a Point in December

Homebuilders' sentiment index slipped a point this December, after declining three points in November, as tight labor resources slowed down the pace of housing recovery.

Homebuilders' confidence for new single-family homes, as indicated by the National Association of Home Builders (NAHB)/Wells Fargo housing market index (HMI), dropped a point to 61 in December per data released on Tuesday.

The recent housing data has been rather soft suggesting some weakening in the pace of recovery. Housing starts declined 11% in October, per data released on Nov 18, primarily due to a sharp plunge in the construction of multi-family units. Existing home sales dropped 3.4% in October as a result of supply shortages, following the September surge, according to data released by the National Association of Realtors in November. November data should come out later this month.

Many homebuilders talked about tight land and labor resources resulting in production constraints in the past quarter. The labor market has tightened with limited availability that arrested the rapid growth in housing production. Limited capital for land and land development has left entitled lands in short supply. The shortage is limiting home production, and thereby lowering the inventory of homes, both new and existing. While labor shortages are increasing wages land prices are inflating due to limited availability.

Rising land and labor costs is a major cause of concern for homebuilders like PulteGroup, Inc. PHM , Lennar Corp. LEN , KB Home KBH and D.R. Horton, Inc. DHI as it hurts margins by limiting the pricing power.

Moreover, tough weather conditions in the first half of the year resulted in land development and related community opening delays in some markets, mainly in Southern U.S. Some homebuilders also complained of a slight slowdown in sales in the Texas/Houston region - mainly at higher price points - due to low oil prices and a resultant economic slowdown.

Nonetheless, the overall fundamentals of the all-important construction sector remain strong and the soft data in November is seen by the market as only a temporary setback. The homebuilders' sentiment index has also remained above 60 for seven straight months indicating builders are in general optimistic about the housing market.

2015 has generally been a good year for the housing market. After a lull in the U.S. housing space in the first quarter, sales picked up in the ensuing months amid an improving economic environment and a better employment picture. Higher job numbers, a recovering economy, moderating home price gains, rapidly rising household formation, affordable interest/mortgage rates, rising rentals, and a limited supply of inventory - all point to continued strong momentum in 2016.

With stabilizing demand, housing price gains are also moderating. Moreover, housing remained an affordable option in 2015 as mortgage rates are below historical levels. The mortgage rates will probably rise based on the hike in the Federal fund rate on Wednesday. Even if we suppose an accompanying rise in mortgage rates with an interest rate hike, we believe they should still remain reasonable, keeping housing affordable. Moreover, the Federal Reserve Chair Janet Yellen has emphasized that even if a rate hike comes at Wednesday's meet, the pace will be slow and gradual given the concerns of tepid global economic growth.

Apartment rental rates have been moving up, making home buying financially attractive. Additionally, as the millennial generation leaves the nest, a sharp spike in household formation is translating into higher demand for new homes.

Further, there is a production deficit of both rental and new homes compared with housing demand resulting in pent-up demand against limited supply. Land and labor shortage is limiting the production of homes.

With oil prices still subdued and the job market looking good, the demand for new homes is on rising.

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PULTE GROUP ONC (PHM): Free Stock Analysis Report

LENNAR CORP -A (LEN): Free Stock Analysis Report

KB HOME (KBH): Free Stock Analysis Report

D R HORTON INC (DHI): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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