To The Moon

A resurgence of optimism has been seen in the homebuilder's market, with builder confidence reaching positive territory for the first time in almost a year, as per the National Association of Home Builders (NAHB)/Wells Fargo housing market index update.

From 50 in May, the index rose to 55 in June, marking a continuous half-year increase in builder sentiment. Several factors contribute to this positive trend, including increased foot traffic from potential homebuyers, a less-hawkish Fed, minimal competition from the resale market, and an improved supply chain.

Notably, most homebuilding stocks like $PulteGroup(PHM)$ , $Toll Brothers(TOL)$ , $M/I Homes(MHO)$ and $Beazer Homes USA(BZH)$ have a sound rank, while $D.R. Horton(DHI)$ also has the ranking to buy.

Recommend to read: NAIL Surged over 137%! What Drives Homebuilding ETFs & Stocks to Hit All-Time High?

Return of Stable Traffic

In 2022, the Fed's aggressive measures against inflation led to a rapid rise in mortgage rates, causing a retreat of homebuyers. However, buyers seem to have accepted the increased borrowing costs this year and have returned to the market.

The increased traffic of prospective buyers has been reflected in the NAHB gauge, which saw a four-point increase in June. The average rate on the 30-year fixed mortgage — the preferred home loan for purchases — was 6.69% last week, slightly up from the 52-week average of 6.26%, per Freddie Mac. However, to attract price-conscious buyers, many builders are offering rates much lower than that through their financing arms.

Impact of Limited Resale Inventory

The increase in mortgage rates has an additional advantage for builders. Higher rates limit the number of homeowners willing to sell their property, which directly benefits new homebuilders by reducing competition from existing homes. This low interest rate lock-in effect is resulting in tight resale inventories and encouraging buyers to focus on new homes.

Sales of new single-family houses in the United States unexpectedly jumped 4.1% sequentially to a seasonally adjusted annualized rate of 683,000 in April 2023, the highest level since March last year, and compared to forecasts of 665,000. No wonder, most renowned companies like D.R. Horton Inc. and $KB Home(KBH)$ reported upbeat results in the just-concluded earnings season (read: Housing ETFs Up on D.R. Horton's Upbeat Earnings).

Sales Forecasts and Homebuilders' Outlook

Given these positive conditions, most major builders have increased their sales forecasts for the remainder of the year. The NAHB measures for current sales conditions and sales expectations six months from now showed increases in June.

Improving Supply Chain

Another positive aspect for builders is an improving supply chain. With the decreasing costs of lumber and more available hiring options, some companies, such as $Lennar(LEN)$ , suggest that the issues regarding supply chain disruptions are largely behind them, per a Yahoo Finance article. However, tight lending standards amid bank failures are causes for concern.

ETFs in Focus

Against the above-mentioned backdrop, investors may tap housing ETFs like $iShares U.S. Home Construction ETF(ITB)$ and $SPDR S&P Homebuilders ETF(XHB)$ . ITB and XHB have gained, respectively, 6.4% and 8.5% past month (as of Jun 19, 2023).

Follow me to learn more about analysis!!