BMI View: Despite mixed housing data from the US in mid- February, we maintain our view that the housing market is undergoing a recovery. We have long highlighted the potential for a rocky return to growth, and therefore are not surprised that data has not been consistently strong. However, general poor investor reaction has been notable on the stock prices of the country's largest homebuilders. W e do not believe that this batch of bad data represents a trend reversal, and we highlight the long- term fundamentals supporting a continued, albeit less steep , recovery in the sector.
February housing data has painted a mixed picture for the residential construction market. Whilst we continued to hold our view that the sector would return to growth for the first time in five years, a view we have had in place for well over a year now, we have always noted that it would not be a smooth road to recovery, with data likely to surprise to the downside if that market gets too confident.
|Market Had Become Too Confident|
|Homebuilder Confidence (LHS) And Housing Starts (RHS)|
Housing starts provided the biggest drive behind market moves, with disappointing data for the month of January sending share prices into freefall. Data came in at 890k for the month, below expectations, and below the psychologically important 900k mark, which data has been above for the last few months. At the same time homebuilder confidence took an unexpected knock, falling for the first time in nine months. These two factors, combined with below expectations results from Toll Brothers, pushed stocks significantly lower on February 20 th.
|Headline Data Ignites Bearish Sentiment|
|Lennar (LHS) And Toll Brothers (RHS) Share Price, US$|
Whilst this data grabbed the headlines, more positive data was also released during the period. Mortgage delinquencies were down, home sales data was positive, and most importantly for the residential construction view, residential building permits hit a four and a half year high. At the same time construction spending on residential projects continues to grow in excess of 20% per month in y-o-y terms.
Consequently, we maintain our view that the residential construction market will continue to strengthen over the coming months and drive overall construction sector growth in 2013. The biggest threats we would highlight are access to financing and mortgages and rising costs for homebuilders. The latter point is especially pertinent for company profitability. Given the steep pickup in demand for building materials following a long period of falling demand, the prices of lumber, cement, and labour are all rising. Homebuilders will be reluctant to pass this on to customers given the still fragile recovery and therefore this could weigh on share prices over the coming months as FY2013 first half results are released.
|Fundamentals Remain Supportive For Construction Growth|
|Residential Construction Spending And Growth (LHS) And Building Permits (RHS)|