Good News From the Home Front

Ever since the housing bubble burst in 2008, the term “housing market recovery” has been treated as an oxymoron. Despite freefalling home prices and a great interest rate environment, potential homebuyers remained skittish—favoring renting over owning. And as demand has remained stagnant, so have two metrics of construction activity: housing starts and building permits.

These are each a measure of homebuilder confidence as builders apply for building permits and begin construction on residential units only when they are confident that these units will be sold. An increase in housing starts and building permits usually occurs a few months after a reduction in mortgage rates.

But this morning brought pleasantly surprising news from the home front as building permits jumped to the highest level in over three years! Specifically, homebuilders filed 717,000 permits in February, representing a 5.1% jump. This trounced economists’ estimates of 680,000. And although housing starts did dip slightly at first glance, the details are more encouraging. Essentially, February housing starts remained unchanged from January’s initial reading of 699,000, but then the January figure was revised upwards to 706,000. So, although the headline looks weak, the details suggest that housing starts are on the mend as well.

Later this week, we’ll get what should be some telling data on existing home sales (due Wednesday) as well as new home sales (out on Friday). In January, both of these measures outstripped economists’ expectations, so I’m optimistic about February’s turnout.

Of course, the million dollar question is whether this has any implications for our investing strategies?

Well, the weakness in real estate has been a big worry for the market, so I am encouraged by these better numbers as we enter into the typical higher-demand spring season. Much of the gains in housing can be attributed to the continued improvement in the job market, which should continue to pick up in coming months.

I don’t currently recommend any direct plays on the housing market in my services, but the situation here is improving, so if you want to get in on the ground floor of some of the nation’s largest players in the residential construction industry, be sure to run your favorite home builder or materials company through my PortfolioGrader Tool first.

I’ve gotten us started with a few major players:

Ticker

Company Name

Industry

Quantitative Grade

Fundamental Grade

Total Grade

EXP

Eagle Materials Inc.

Construction Materials

B

C

B

NVR

NVR Inc.

Residential Construction

D

D

D

RYL

Ryland Group Inc.

Residential Construction

B

C

B

TOL

Toll Brothers Inc.

Residential Construction

B

D

B

HOV

Hovnanian Enterprises Inc.

Residential Construction

C

C

C

PHM

PulteGroup Inc.

Residential Construction

B

C

B

LEN

Lennar Corp.

Residential Construction

A

D

B

FAST

Fastenal Corp.

Building Materials

A

B

A

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