How Damaging is the Decline in Housing Starts & Permits?

After two months of robust gains, housing starts and permits results were not impressive last December. Per the latest jointly released report from the U.S. Census Bureau and the U.S. Department of Housing and Urban Development, housing starts decreased 8.2% in December 2017 to 1.92 million units (seasonally adjusted annual rate) from the prior month owing to a 11.8% drop in single-family housing starts. This also marks the highest drop since November 2016 owing to colder than normal temperatures in some parts of United States.

Residential building permits, an indicator of upcoming construction activity, decreased 0.1% in December to an annualized rate of 1.3 million units from November. Single-family home permits increased 1.8%, while that for the construction of multi-family homes decreased 4.3%.

Moreover, the confidence level among the nation's homebuilders slipped slightly in the first month of 2018 after reaching an 18-year high in December 2017, according to the National Association of Home Builders’ (NAHB) Housing Market Index.

The January 2018 reading was down two points to 72 from the December level of 74. Notably, all three Housing Market Index (HMI) components slipped slightly. Current sales conditions decreased one point to 79. Buyer traffic decreased four points to 54 and sales prediction over the next six months slipped one point to 78.

Is It Really a Concern?

The latest disruption is not really a concern as it is more likely because of an extremely cold winter. The larger picture is still overwhelming with building permits increasing 4.7% in 2017 and housing starts rising 2.4% over the 2016 figure. Moreover, a builders confidence reading in the 70s range is considered confident enough. Therefore, it is not necessary to pay heed to the current decline in data.

Investors can be fairly confident about the housing sector’s performance in 2018 on an improving economy, modest wage growth, low unemployment levels, positive consumer confidence, a tight supply situation and escalating rent costs.

After the solid 3.1% economic growth in the July-September quarter, the world’s largest economy is expected to advance 3.3% in the fourth quarter of 2017, per the latest Atlanta Fed’s real-time Q4 GDP growth estimate. This solid upbeat projection holds particularly true when one of the nation’s key economic drivers, i.e. construction activity, is strengthening. Also, a declining unemployment rate (4.1% in December 2017) is encouraging.

Though the U.S. housing industry is gradually recovering from damages caused by the recent hurricanes, limited land availability, labor shortage and higher material costs, there is nothing to fret about. Also, despite a probability of mortgage rate hikes in 2018, optimism surrounding the housing market remains largely unaffected.

How is the Sector Placed?

The Zacks Homebuilding Industry has advanced 70.4% in the past year, comparing favorably with 24% growth of the broader market (S&P 500). Moreover, a strong industry rank (Top 6% out of more than 250 industries) supports the growth potential of the stocks in this industry.

 

 

Moreover, this industry’s three-five year expected earnings per share (EPS) growth rate of 16.3% is better than the broader market’s 9.7%.

Major homebuilders like KB Home KBH, Lennar Corporation LEN, D.R. Horton, Inc. DHI and NVR, Inc. NVR, to name a few, are well poised on bullish fundamentals of the housing market.

While KB Home, Lennar and D.R. Horton sport a Zacks Rank #1 (Strong Buy), NVR carries a Zacks Rank #2 (Buy). YYou can see the complete list of today’s Zacks #1 Rank stocks here.

Will You Make a Fortune on the Shift to Electric Cars?

Here's another stock idea to consider. Much like petroleum 150 years ago, lithium power may soon shake the world, creating millionaires and reshaping geo-politics. Soon electric vehicles (EVs) may be cheaper than gas guzzlers. Some are already reaching 265 miles on a single charge.

With battery prices plummeting and charging stations set to multiply, one company stands out as the #1 stock to buy according to Zacks research.

It's not the one you think.

See This Ticker Free >>

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
 
Lennar Corporation (LEN) : Free Stock Analysis Report
 
KB Home (KBH) : Free Stock Analysis Report
 
D.R. Horton, Inc. (DHI) : Free Stock Analysis Report
 
NVR, Inc. (NVR) : Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research