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Predictions in Construction with a Hint of Optimism

by Chicago Agent

By Peter Ricci

Economic analysis is among the more unforgiving fields of study in the wide world of academia. In judging the ebbs and flows of the market, researchers are expected to present logically-sound, factually-based studies of where the economy and its various subsets are headed in the following months; no industry has challenged this practice more thoroughly than housing, which has offered enough ups and downs the last five years to finance a Hollywood epic.

Several pieces of key economic data that came out last week, though, would seem to suggest that predictions of a recovery in residential construction are not that far off the mark.

First, the U.S. Census Bureau and the Department of Housing and Urban Development released hugely promising data on February building permits on March 20, reporting an annual rate of 717,000. This was a 5.1 percent increase from January and 34.3 percent increase from February 2011.

Though housing starts were down 1.1 percent from January to 698,000, they were up an impressive 34.7 percent from last year. In addition, the data on permits, which included a 4.9 percent monthly increase for single-family authorizations, bodes extremely well for housing starts in March and the months ahead,
considering permits are always filed in anticipation of new construction.

All of this activity has been reflected in the National Association of Home Builders/Wells Fargo Housing Market Index (HMI), which came out March 19. Holding steady at 28 in March, the index maintained its highest level since June 2007, and regionally, it gained two points in the Midwest to settle at 32.

A key measure of builder confidence for newly built, single-family homes, the HMI is derived from a monthly survey the NAHB conducts to gauge builder perceptions on current single-family home sales and sales expectations for the next six months, along with the rate of traffic for prospective buyers.

Barry Rutenberg, the NAHB’s chairman, said gains in the local markets have driven builder optimism.

“While builders are still very cautious at this time, there is a sense that many local housing markets have started to move in the right direction and that prospects for future sales are improving,” Rutenberg said. “This is demonstrated by the fact that the HMI component measuring builder expectations continued climbing for a sixth straight month in March, to its highest level in more than four years.”

David Crowe, the NAHB’s chief economist, placed the HMI’s recent gains in a historical perspective that only made its progress more impressive.

“Builder confidence is now twice as strong as it was six months ago, and the West was the only region to experience a decline this month following an unusual spike in February,” Crowe said.

Though the HMI component for current sales conditions declined one point to 29, the component gauging sales expectations gained two points to 36 and the prospective buyer component held unchanged at 22.

But don’t take our word for it; even investors are betting on a construction recovery. Barclays Capital has recently upgraded the stocks of four homebuilders, including Pulte Group and KB Home; an index by Standard & Poor’s that tracks homebuilders is up 80 percent since October; and the individual stocks at
Toll Brothers and KB are up 21 percent and nearly 50 percent, respectively.

Also, Hovnanian Enterprises, which was the nation’s seventh largest homebuilder in 2010, had net home sales of 940 for the fourth quarter (ending Jan. 31, 2012), an 18.7 percent increase from the previous quarter. When including joint ventures, sales for the quarter were up by 26.9 percent, and February sales were even higher, posting a year-over-year increase of 37.5 percent.

Economics is a tricky field, and the last five years have all but eliminated any certainty regarding
housing research. The preponderance of recent data, though, may indeed reintroduce that concept into the analytical lexicon.

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