New Home Sale Reports
Several different reports shed (or should shed) light on homebuilders, including new permits, new housing starts, closed sales of newly constructed homes and homebuilder confidence levels. Again, these results may sometimes contradict each other, so it’s important to know where each one fits in the larger picture of what matters.
New Permits (B+): New building permits are an excellent gauge of future strength or weakness in the housing market. There’s normally about a six-month gap between a permit being issued and new home construction being initiated. Although not all permits will eventually become new homes, the year-over-year change number is the one that matters in determining the trend of the real estate market.
For example, in September 2011 builders reported that home construction was down nearly 6% from September of the previous year, but permits were up almost 8%. This somewhat confusing report actually showed that although the construction industry hadn’t been building much recently, it was preparing to begin new projects in the months ahead.
For long-term investors this created an opportunity to get in on some homebuilder stocks cheaply before the market showed signs of improvement via closed sales.
Housing Starts (B): Housing Starts are the number of privately owned new housing units on which construction has begun in a given period. The report is divided into single-family, townhomes or small condos, and apartment buildings of five or more units.
What’s confusing is that when construction of apartment buildings is high, it creates a larger-than-usual housing starts number because each apartment unit is counted individually. Therefore, an apartment with 45 units would be counted as 45 starts, rather than one start. This can lead investors to misinterpret the higher count as single-family home starts.
Builder Sentiment (C-): The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) is a monthly survey of builders‘ sentiment about current single-family home sales as well as sales expectations for the next six months. Builders are asked to rate traffic of prospective buyers in terms varying from “very high” to “poor.” Their responses are then scored, with 50 being a “good” number.
Although the accuracy of rating something “good” or “fair” is difficult to assess, the stock market will rally or drop on the HMI survey’s numbers. But because this report is an accounting of subjectivity among builders and tries to quantify narrative responses, its reliability as a market predictor is somewhat limited.
Real estate reports often appear contradictory because each one covers a different aspect of the market and has a different meaning, some reports are more precise than others and there’s often lag times for certain reports that makes it seem as if the real estate market is a giant roller coaster. However, investors should focus on closed sales, the Case-Shiller National Index and building permits as the most accurate indicators of whether real estate-related stocks will do well or not.