Housing Starts Rebound, Lift Homebuilder Stocks: Sign Of Economic Resilience

New housing projects initiated by homebuilders in February exceeded expectations, reversing the downward trend seen in January due to severe winter storms.

Housing starts soared by 10.7% month-on-month in February to an annualized rate of 1.521 million, beating forecasts of 1.425 million. Much of the gain was seen in single family housing starts.

In January, poor weather hampered builders breaking ground on new projects and just 1.374 million housing starts were seen that month, down 12.3% from the previous month.

Meanwhile, building permits, which are seen as an indicator of future building activity, rose by 1.9% in February to 1.518 million.

Affordability Issues In Housing Market

While high interest rates continue to pose affordability issues in the housing market, the average rate for a 30-year mortgage has eased over the past three weeks, standing at 6.74% as of March 14.

Sales of new homes have begun to creep higher, but remain down at the levels seen in the spring and early summer of 2023. In January 661,000 new homes were sold, missing forecasts of 680,000. The consensus forecast for February sales is 673,000.

“Demand for new homes is holding up despite still-high mortgage rates, largely due to a shortage of existing homes for sale. Few existing homeowners want to move, as most locked-in very low mortgage rates during the pandemic,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

But housebuilders shares have flagged in recent days under the strain of a market where persistent high interest rates and affordability remains the biggest risk in terms of sales.

While demand remains robust and supply short, average house prices will remain close to historic highs.

The average house price in the U.S. currently stands at around $492,000. This is down from the $552,600 record seen in the fourth quarter of 2022, but still high by historical standards.

Also Read: Retail Sales Climb In February As Consumer Activity Picks Up, But Miss Expectations: ‘The Economy Is Slowing’

Market Reactions

Since the beginning of 2023, the iShares U.S. Home Construction ETF ITB, an exchange traded fund that tracks the aggregate prices of U.S. homebuilders, has gained 78%. However, since the start of March it is down 1.6%.

Among the top stocks in the ITB, D.R. Horton Inc DHE, the country’s biggest homebuilder, is flat over the year after its quarterly results disappointed, while Lennar Corporation LEN remains 5% higher year-to-date, despite a sharp drop last week after missing revenue estimates.

Jeffrey Roach, chief economist for LPL Financial, said: “Investors should know that demand for new homes remains fairly stable despite high borrowing costs. Markets have rewarded investors aware of the opportunities in housing-related sectors.”

Now Read: Warren Buffett’s Bet On Lennar: Will The Homebuilding Giant’s Earnings Report Validate The Investment?

Image created using artificial intelligence with Midjourney.