The U.S. housing sector failed to match the expected growth in 2014. However, uptick in construction spending, positive housing sales reports, drop in home prices, lower mortgage rates and improving labor market conditions are expected to perk up the housing sector this year.
The US Census Bureau of the Department of Commerce reported construction spending of $982.1 billion in December. This was 0.4% higher than the revised November estimate of $978.6 billion. Gains in home building activity and government construction were cited to be the primary reasons for this increase in construction spending.
However, this increase in the payout by builders on residential and nonresidential structures was less than the consensus estimate of an increase of 0.7%. Nevertheless, revision of November numbers from a negative 0.3% to a negative 0.2% turned out to be a significant development. The Dow Jones U.S. Select Home Construction Index (DJSHMB) has increased 7.5% in the last three months.
Home Sales Increases, Housing Starts Rise
A flurry of housing sales reports released in December supports the view that the housing sector is picking momentum. The annual pace of sales of new and existing homes along with residential construction activities slowed down last year. However, all three data in Dec 2014 ended on a positive note. All three data had robust gains in 2012 and first half of 2013.
Sales of new single-family houses touched the highest level in more than six years in December. The U.S. Department of Commerce reported that new home sales gained 11.6% in December to a seasonally adjusted annual rate of 481,000, beating the consensus estimate of 453,000.
Moreover, the National Association of Realtors reported that existing home sales gained 2.4% in December to seasonally adjusted annual rate of 5.04 million. December’s gains followed a downwardly-revised 4.92 million in November. However, the figure missed the consensus estimate of 5.07 million. Nevertheless, the figure advanced 3.5% year over year and stands above year-ago levels for the third consecutive month in December.
The National Association of Realtors also reported that the Pending Home Sales Index declined 3.7% in December from November’s reading to 100.7, in contrast to the consensus estimate of 1% gain. This was the biggest decline since Dec 2013. However, the index witnessed its biggest year-on-year gain of 11.7% in December since Jun 2013.
Separately, the U.S. Department of Commerce reported that privately-owned housing starts increased by 4.4% to 1,089,000 in December from November’s revised tally of 1,043,000. December’s numbers also exceeded the consensus estimate of 1,045,000. Single-family housing starts gained 7.2% in December to 728,000 from November’s revised figure of 679,000.
Meanwhile, building permits were revised up 0.5% in December to a seasonally adjusted rate of 1,058,000. Building permits were previously reported to have decreased at a rate of 1.9% in December to 1,032,000.
Mortgage Rates Remains Near Historical Low levels
Mortgage company Freddie Mac said the standard 30-year mortgage rate edged up to 3.66% last week. However, the rate remained at its lowest level since May 2013. Prior to last week, average long term U.S. mortgage rates had dropped for four straight weeks. Drop in mortgage rates resulted in a sharp rise in mortgage applications, according to the Mortgage Bankers Association. Mortgage application activity included both refinancing and home purchase.
U.S. new home sales accelerated in December, boosted by the continuous drop in mortgage rates. Moreover, the Obama administration is cutting mortgage insurance fees in order to make home loans more affordable for millennial. Drop in insurance premiums for Federal Housing Administration loans will reduce the mortgage payment of the borrower by around $900 annually.
Further, increase in home prices at a slower pace improved affordability level of new buyers. The S&P/Case-Shiller's 10-city composite index reading showed that home prices in the U.S. increased 4.2% year over year in November, less than 4.4% year-over-year rise in October. Similarly, the 20-city composite index advanced 4.3% year over year in November from a 4.5% year-over-year rise in October.
Homebuilder Confidence Dips, Hovers Above 50
The National Association of Home Builders/Wells Fargo said the U.S. homebuilders’ sentiment gauge moved down in January. The sentiment gauge went down to 57 in January from December’s upwardly revised reading of 58. However, the index remained above the key level of 50.
Additionally, upbeat consumer confidence data and improving job numbers is expected to propel consumer spending, which will in turn boost home building. The Conference Board reported that Consumer Confidence Index increased to 102.9 in January, its best level since Aug 2007. Separately, the U.S. Department of Labor reported that jobless claims declined 43,000 to 265,000 in the week ending Jan 24, the lowest level of initial claims recorded in 14 years.
The SPDR S&P Homebuilders (NYSE:XHB) was in a consolidation mode last year. The year-long base that XHB formed is expected to act as a launch pad for its advance in the near future.
3 Prominent Picks
Given the encouraging trends in the housing sector, related stocks are poised to move north. These includes home furnishing companies. The three stocks listed below have strong fundamentals, growth prospects and favorable Zacks Rank. Further, continuous drop in fuel prices will increase the purchasing power of consumers, which in turn will boost these stocks.
Haverty Furniture (NYSE:HVT) operates as a retailer of residential furniture and accessories in the U.S. The company was incorporated in 1885 and is headquartered in Atlanta, Georgia.
In the past two months, the Zacks Consensus Estimate for the current year was revised 1.7% higher. This Zacks Rank #1 (Strong Buy) stock has a forward price-to-earnings ratio (P/E) of 17.8, lower than the industry average of 22.7. The stock gained 13.2% in the last four weeks.
Pier 1 Imports, (NYSE:PIR) is involved in retail sale of decorative home furniture, gifts, and related products. The company was incorporated in 1970 and is headquartered in Fort Worth, Texas.
Over the past two months, the Zacks Consensus Estimate for the current year was revised 3.1% higher. This Zacks Rank #2 (Buy) stock has an attractive P/E (F1) of 16.9x. The stock gained 13.9% in the last four weeks.
Restoration Hardware Holdings, (NYSE:RH) is engaged in retail sale of home furnishings including furniture, lighting, textiles, bath ware, tableware etc. The company was incorporated in 1979 and is headquartered in Corte Madera, California.
In the past two months, the Zacks Consensus Estimate for the current year was revised almost 0.9% higher. This Zacks Rank #2 (Buy) stock surged 62.1% in the past one year, demonstrating its inherent strength.
All three stocks have a Zacks Industry Rank in the top 37%.