March Builders' Confidence On A "Solid Footing": 5 Picks

Homebuilders’ confidence data for March was solid. Does this imply that builders are shaking off worries associated with rising costs of materials owing to new tariffs on lumber, aluminum and steel as well as apprehensions related to higher mortgage rates? The latest reading surely points at renewed strength in the sector.

According to the latest report of the National Association of Home Builders (NAHB) and Wells Fargo, Housing Market Index reading is still very strong at 70. Homebuilder confidence in the United States saw a modest decrease (down 1 point from last month), as expected.

"Builders' optimism continues to be fueled by growing consumer demand for housing and confidence in the market," said NAHB Chairman Randy Noel, a custom homebuilder from LaPlace, Louisiana. "However, builders are reporting challenges in finding buildable lots, which could limit their ability to meet this demand."

Housing Market Index primarily reflects builders’ perceptions of current single-family home sales and sales expectations for the next six months. Notably, buyer traffic fell three points to 51. Sales prediction for the next six months dropped two points to 78. However, the component gauging current sales conditions remained unchanged from the previous month at 77.

Consumer Demand Remains Elevated

The latest report from the Mortgage Bankers Association or MBA shows that mortgage applications for new home purchases were 4.6% higher in February compared with a year ago and up 3% from January 2018, and inventory of previously-owned homes was at multi-decade lows.

U.S. homebuilding performed well in 2017, giving investors ample scope to rake in handsome gains. This year, the industry looks equally attractive, courtesy of solid economic growth and job market. Consistent job growth, growing interest from first-time homebuyers as well as high homebuilder confidence are adding to the momentum.

Yet, builders are concerned about growing labor shortage and limited land availability that are shrinking margins, thereby prompting them to push prices higher. Apart from concerns related to a series of interest rate hikes by the Federal Reserve, homebuilders are now worried about higher material costs, thanks to newly imposed tariffs on aluminum and steel. These are restricting homebuilders from responding to growing demand.

Construction costs escalated in February, driven by price increases for a wide range of building materials including steel and aluminum, per the latest March report released by the Associated General Contractors of America of Labor Department. Association officials have also warned that newly imposed tariffs on these metals will create steeper increases that will squeeze budgets for infrastructure, school districts and commercial projects.

That said, consumer confidence, shot up to 130.8 in February, the best since November 2000 when it logged a reading of 132.60 — its highest level so far.

Robust economic conditions and impressive employment rate boosted consumer confidence. For the fifth month in a row, the jobless rate remained unchanged at 4.1% in February, a 17-year low. Improving economic growth supported by a better employment picture generally boosts housing activity and provides the basis for stronger demand.

With these economic fundamentals in place, the overall homebuilding picture is pretty encouraging for 2018.

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