Biggest weekly gain in 9 months for US homebuilders

PUBLISHED : Wednesday, 22 October, 2014, 5:16am
UPDATED : Wednesday, 22 October, 2014, 6:30am

In a week when stock markets were roiled over concern that the global economy is faltering, homebuilders in the United States had the biggest gain in almost nine months.

The 11-member Standard & Poor's Supercomposite Homebuilding Index rallied 6 per cent since October 10, the largest weekly increase since January, as global turmoil fuelled a plunge in mortgage rates and housing starts jumped.

The broader S&P 500 Index recorded its fourth week of losses.

"Even when the market was having some pretty bad days, the builders outperformed," said Megan McGrath, an analyst with MKM Holdings. "A lot of little things have gotten together to get people maybe a little more optimistic."

A drop in mortgage rates has the potential to boost home sales and gives builders reason to take on more projects. Average rates on 30-year home loans fell to 3.97 per cent, the lowest since June last year, according to Freddie Mac.

The Department of Commerce said housing starts climbed 6.3 per cent last month to an annual pace of 1.02 million, crossing what McGrath called the "psychologically important" one million barrier.

Shares of homebuilders extended gains after reports the Federal Housing Finance Agency, which regulates Freddie Mac and Fannie Mae, plans new steps to encourage lending to buyers with less-than-perfect credit scores.

The housing finance agency was also planning an effort that would allow buyers to make down payments as small as 3 per cent of the purchase price, two people with direct knowledge of the matter said.

"That's good news," said Jeff Meyers, the president of Meyers Research, a homebuilding-consulting unit of Kennedy Wilson Holdings. "The mortgage industry is the No 1 issue holding up growth in housing."

Not all the data was positive. Confidence among homebuilders dropped to a three-month low, the National Association of Home Builders/Wells Fargo index of builder sentiment showed, with the measure dropping to 54 from 59 last month.

Readings greater than 50 mean more respondents report good market conditions.

"It's still at a relatively high level," said Mark Vitner, a senior economist with Wells Fargo Securities. "In the measures of future buyer traffic, they still remain exceptionally strong."

Homebuilder shares are down about 7 per cent for the year, which presented a potential buying opportunity, McGrath and Meyers said.

Builders had been trading below their long-term average of 1.6 times book value, a measure of the total assets on their balance sheets, McGrath said.

New-home construction, including apartments, was still running about one-third below its long-term normal pace of 1.5 million units a year, leaving plenty of room for growth if unemployment continued to decline, Meyers said.

"Continued job growth will make housing demand stronger," Meyers said. "A lot of people say we should get back to 1.5 million. It's just a matter of when."

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