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Saturday, January 19, 2013

Bothered by Stalled Homebuilder Sentiment?

By "The Greek"

The National Association of Home Builders (NAHB) reported a stalling in the improvement trend in its Housing Market Index (HMI), which is produced monthly in conjunction with Wells Fargo (NYSE: WFC). The HMI measures the mood of builders, and has been steadily improving over the last year. In the case of the latest report, I think the pause in that trend reflects fear rather than reality, and so real estate enthusiasts can expect the good trend to continue at least for the near future.

The NAHB said its Housing Market Index stuck at a mark of 47 in January 2013, killing an improvement trend that had lasted eight months. Economists were looking for a modest gain this month, with the consensus expectation set at 48, according to a Bloomberg survey.

Component indexes were mixed in January. The measure of the home builder view of current sales conditions stuck at 51, while expectations for the next six months eased by a point to a sub-index mark of 49. In the past, I’ve warned that each of these measures is prospective, and that the measure of current traffic conditions is more useful. This last measure improved by a point, but only to a level of 37. I’m reminding readers that 50 is the delineating point between good and poor perspectives. If prospective buyer traffic (a tangible measure) sits so far below 50, then operating conditions are not so great. I’ve explained this in the past by noting that the majority of builders are small operators who are poorly capitalized today versus the big public builders like PulteGroup (NYSE: PHM), D.R. Horton (NYSE: DHI) and Toll Brothers (NYSE: TOL). When given an equal vote, these smaller builders accurately pull down the indexes measuring general perspective. At the same time, larger builders are taking market share and benefiting more from the real estate market recovery.

Still, even the traffic numbers have been improving, despite the obstacles noted by the NAHB including: still relatively tight credit conditions; difficulty in obtaining accurate appraisals; and D.C. dysfunction. In fact, I believe it was very likely the fiscal cliff fiasco that hampered home builder sentiment at the January inquiry. In articles leading up to the end of 2012, I warned of and noted the economic effects of fiscal cliff fear alone, versus the well-documented impending impact of potential legislative change. I believe that’s what we’re seeing in the HMI this month as well. Even after last minute mitigation materialized and stocks celebrated the result, the economy remained on hold due to the risks tied to the debt ceiling debate.

Still, the SPDR S&P Homebuilders (NYSE: XHB) grabbed ground this past week thanks to a better than expected improvement in Housing Starts. The XHB gained 1.6% on the week, beating the 0.85% increase of the SPDR S&P 500 (NYSE: SPY). PulteGroup (NYSE: PHM) did far better, taking 5.9% of upside; TOL was up 4.8%. So, the reality of the situation, as clarified by data tracking real activity, outweighs the importance of the sentiment measure, which has been more grossly infected by the chaos in Congress. Though real and actually terrifying risks remain around the debt ceiling issue, general improvement should continue in housing for as long as Congress doesn’t drop the ball. If they do, all bets are off.

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