Housing Starts Rise 4.4%, Building Stocks Gain

Housing starts rose more than expected in December, ending the year on a strong note and raising hope for better housing conditions in 2015.

Data released by the U.S. Department of Housing and Urban Development and the U.S. Census Bureau on Jan 21, showed that housing starts rose 4.4% to an annualized rate of 1.089 million units from a downwardly revised November number. Analysts, in general, were expecting starts to rise to around 1.04 million units.

Moreover, housing starts improved 5.3% year over year driven by a boost in single-family homes. Single-family housing starts rose 7.2% in December hitting a seven-year high.

Building permits — a gauge of future construction — declined 1.9% in December, due to fewer multi-family permits. Building permits for single-family homes climbed 4.5%.

Homebuilder stocks rose on Wednesday, following the upbeat data. While Lennar Corp. (LEN) increased more than 2%, DR Horton, Inc. (DHI) improved 2%; and Toll Brothers, Inc. (TOL) and PulteGroup Inc. (PHM) traded at around 1% higher.

Home builders are also becoming more optimistic. Homebuilders’ confidence, as indicated by the National Association of Home Builders (NAHB)/Wells Fargo housing market index, has remained in the upper 50s range for three consecutive months in January.

Economic growth, improving job scenario, growing consumer confidence, moderating home prices and low interest rates aided housing market growth 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.

The positives also include President Obama’s recently announced plans to cut premiums on mortgage insurance to encourage activity 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 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.

Moreover, concerns persist regarding 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.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

To read this article on Zacks.com click here.