Homebuilders’ confidence, as indicated by the National Association of Home Builders (NAHB)/Wells Fargo housing market index, dipped a point in January from an upwardly revised 58 in Dec 2014.
Nevertheless, the index reflects an optimistic outlook among builders for the upcoming quarters as any reading on this index above 50 indicates good housing conditions. The index has remained in the upper 50s range for three consecutive months now as demand for new homes increases with steady economic growth, improving job market and growing consumer confidence.
Additionally, moderating home prices and low interest rates contributed to the improvement in the housing market in the second half of 2014, though at a slow pace.
The general market sentiment indicates that homebuilding activity will pick up in 2015 backed by improving job numbers and rebounding economy. Moreover, lower fuel prices have greatly increased the purchasing power of U.S. consumers following record employment levels. A reduction in fuel costs is increasing consumer confidence, which in turn will boost home building.
To add to the slew of positives, President Barack Obama recently announced plans to cut premiums on mortgage insurance to encourage home buying among first-time homebuyers.
Freddie Mac Chief Economist, Frank Nothaft, expects housing starts to rise about 15% in 2015 and home sales to be up 4%. NAHB has projected that in 2015 single-family production to rise 26% and multifamily starts to go up 2%.
However, some concerns do remain that can hamper housing growth in 2015. Two homebuilders — Lennar Corporation (LEN) and KB Home (KBH) — warned of gross margin pressures in 2015 while announcing the earnings results for this quarter. Higher labor, material and land costs, moderation in pricing power and higher incentives took a toll on gross margins of these companies in the December quarter.
Following the lower margins reported by KB Home and Lennar, share prices of other homebuilders also dipped. PulteGroup, Inc. (PHM), Meritage Homes Corp. (MTH) and D.R. Horton Inc. (DHI) declined over 5% on Jan 15, the day Lennar released its earnings result.
Moreover, worries also persist in the form of a possible rise in interest/mortgage rates in 2015 with the Federal Reserve closing the ‘quantitative easing’ program in October last year. Higher interest/mortgage interest rates may moderate housing demand and pricing.
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