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Rise in US Housing Construction Affects Homebuilding Stocks

Several housing reports released this week have revealed a surge in home construction everywhere, as well as homebuyer confidence, thus triggering a wave of increases for homebuilding stocks.

Earlier today, the U.S. Census Bureau jointly announced with the Department of Housing and Urban Development the new residential construction statistics for September 2012. Privately-owned housing units reported to authorizing more than 894,000 homebuilding permits, a 45.1 percent increase from last year’s 616,000.

At the same time, single family housing experienced a 6.7 percent rise in authorized building permits within a one-month timeframe, at a rate of 545,000 compared to August’s 511,000.

As for housing starts and housing completions, the Census Bureau and HUD reflected a similar trend of increases. Privately-owned housing starts jumped 34.8 percent compared to last year, whereas in one month, single-family housing completions rose 8.5 percent.

On Monday, the National Association of REALTORS released a report that indicated nationally lower housing inventories (a total of 17 percent lower than last year’s inventory) suggesting progressive homebuyer activity, in addition to a higher median list price; September’s median list price for homes are about .78 percent higher than a year ago.

The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) also released a report on Tuesday, stating that October made its sixth consecutive month of higher buyer confidence rates for newly built single-family homes.

“Many builders are reporting increases in the number of serious buyers visiting sales offices, and the overall confidence measure is much higher than it was at this time of year,” NAHB chairman, Barry Rutenberg said.

As the news about the housing market quickly circulated, several publicly traded homebuilding stocks experienced a slight surge in value, including PulteGroup Inc. (PHM), Lennar Corporation (LEN), M.D.C. Holdings Inc. (MDC), Toll Brothers Inc. (TOL), K. Hovnanian Homes (HOV) and D.R. Horton (DHI).

Although some companies only inched about 3 to 5 percent higher in price – like Lennar, D.R. Horton and Beazer Homes (BZH), to name a few -- others reveled in as high as 6 to 10 percent increases. Pulte Group met a 6.4 percent increase, while both K. Hovnanian Homes and KB Home met closely with an increase at about 9.3 percent.

Even non-homebuilding, yet closely related companies, were influenced by the upbeat housing data – home improvement retailers Home Depot (HD) and Lowe’s Companies (LOW) both underwent at least a 2 percent increase in stocks. Paint manufacturer and distributor, Sherwin Williams (SHW) also took part in the stock value jump, only $2 away from reaching its 10-year high.

“Today’s strong report…confirms our view that a housing recovery is solidly underway in a growing number of markets nationwide,” said David Crowe, NAHB’s chief economist. “That said, we are now almost at the half-way mark in terms of what would be considered a normal amount of new-home construction in a healthy economy, and we need to see consistent improvement like this over an extended period to get back to where the market should be in terms of generating jobs and economic growth.”

Despite recent growths in the housing market, economists and analysts are not completely buying into a promising future just yet. Rutenberg shares this sentiment.

“While September’s surge in activity is certainly encouraging, we need to remember that we still have a long way to go back to fully functioning market,” Rutenberg said. “In order to get there, significant challenges must still be addressed in terms of credit availability and appraisal issues, as well as the increasing cost of building homes due to rising materials’ prices and a declining inventory of buildable lots.”

About the author:

Dianne Tordillo
Dianne Tordillo is staff writer for GuruFocus.com. She reports on a variety of financial news, primarily dealing with investor portfolios and stock trades. Her articles also highlight insider trades, as well as the many useful features of GuruFocus.

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