Homebuilders’ sentiment has turned negative in April due to nationwide economic crisis caused by coronavirus. Furthermore, unemployment levels are skyrocketing and the gaps in the supply chain have been hampering construction activities.
Per the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) released on Apr 15, confidence level among single-family builders plummeted a significant 42 points to just 30 from March’s reading of 72. Importantly, this marked the highest monthly decline in the index’s 30-year history and lowest reading since June 2012.
NAHB chairman Dean Mon said, “This unprecedented drop in builder confidence is due exclusively to the coronavirus outbreak across the nation, as unemployment has skyrocketed and gaps in the supply chain have hampered construction activities.”
Weakest Confidence in Last 8 Years
Builders have started responding to market conditions since the start of the busiest housing season, i.e. spring. Notably, in March, the metric declined two points from February.
Precisely, all the three indices plunged in April. The HMI gauging sales conditions declined 43 points from the last month to 36. Traffic of prospective buyers also dropped 43 points to 13 and sales predictions for the next six months decreased 39 points to 36.
The three-month moving averages for regional HMI reading were also concerning in all regions. Northeast reported a 45-point decline to 19, Midwest fell 42 points to 25, South dropped 42 points to 34 and West deceased 47 points to 32 from the prior-month figures.
Historic Unemployment Increase in March
On Apr 3, the Bureau of Labor Statistics announced that unemployment rate jumped 90 basis points to 4.4% in March from a 50-year low February’s reading of 3.5%. Notably, this marked the largest month-over-month increase since January 1975, as the country lost 7.1 million jobs. Moreover, the April reading, scheduled to release on May 8, is expected to further worsen. Notably, the March data was collected in mid-March, before lockdown was imposed in a significant manner.
The number of people on a nationwide basis who applied for unemployment benefits post the week ended March 21 soared past 16 million.
Post Pandemic Scenario for Residential Construction
The housing market showed signs of strength in the first two months of the year, wherein new home sales saw the highest pace since the Great Recession. The January data, which increased 7% from December 2019, marked a 13-year high reading. Again, in February, the metric was 14.3% higher than the year-ago figure, marking the second-highest increase since 2007.
Housing starts — a gauge of privately-owned new houses on which construction has started — also jumped 21.4% and 39.2% in January and February, respectively, on a year-on-year basis.
Although certain states like New York, Pennsylvania, New Jersey, Washington, Michigan and Vermont have shut down most of their operations, the federal government has deemed construction as an essential business during the coronavirus pandemic. Notable homebuilders like Lennar Corporation (NYSE:LEN) LEN and KB Home KBH, both carrying a Zacks Rank #3 (Hold), announced during their respective earnings release that they are still building homes. The companies have shifted their corporate and division office functions on a remote basis and are accepting electronic notes. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Meanwhile, market pundits anticipate an improvement in economic conditions post June. With easing of the effects of the pandemic, most homebuyers are expected to return to the marketplace.
NAHB chief economist Robert Dietz stated that according to the recent poll undertaken by NAHB, 96% of its total members reported that virus mitigation efforts were hurting buyer traffic. He added that although the pandemic is severely disrupting residential construction and the overall economy, the need and demand for housing remain acute. He believes that as social distancing and self isolation practices are relieving the pandemic’s effects, the economy is likely to come out of a recession later in 2020.
The Zacks Building Products - Home Builders industry has improved 17.1% in the past month compared with the Zacks Construction sector and S&P 500 composite’s 10% and 12.2% rally, respectively. Although investors’ sentiments are building strength, near-term prospects for biggies like D.R. Horton, Inc. DHI, Toll Brothers, Inc. TOL, PulteGroup (NYSE:PHM), Inc. PHM, NVR, Inc. NVR and Meritage Homes Corporation MTH look grim, as envisioned by lower sales predictions for the next six months.
Overall, the duration of the pandemic will determine how quickly the economy and homebuilding market can rebound.
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PulteGroup, Inc. (PHM): Free Stock Analysis Report
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