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Positive Housing Data; Guidance Make Sector a Long-term Play

Recent housing-related figures from a wide range of players in the space indicate the economy is continuing to recover. The positive data can be used as a basis for those who may have avoided the space as a long-term investment play.

Housing-related data came from many sources this week. On Thursday, the Commerce Department released new home sales. On Wednesday, the National Association of Realtors released numbers for existing home sales for May. Home Depot (NYSE: HD) received an upgrade by an analyst who noted that a slowdown in the growth of home prices doesn’t present as much risk anymore. Lastly, KB Home (NYSE: KBH) and Lennar (NYSE: LEN) reported strong earnings this week.

 · Commerce Department numbers

In May, new home, single family home sales dropped 6% to a seasonally adjusted annual rate of 551,000 units, according to the Commerce Department. Also, April’s sales pace was revised down to 586,000 units, still the highest since February 2008, from the previously reported 619,000 units.

Although they make up just a tenth of all home purchases, they are important nonetheless. Just consider all of the other areas that are affected. Home building generates substantial economic local activity, including new income and jobs for residents, and additional revenue for local governments, notes the National Association of Home Builders.

 · National Association of Realtors

Realtors especially benefit from upticks in the housing industry. The group that represents them, the National Association of Realtors, reported that existing-home sales sprang ahead in May to their highest pace in almost a decade, while the uptick in demand this spring amidst lagging supply levels pushed the median sales price to an all-time high. Also, all major regions except for the Midwest, saw strong sales increases last month.

The group reported that total existing home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, grew 1.8% to a seasonally adjusted annual rate of 5.53 million in May from a downwardly revised 5.43 million in April. With last month’s gain, sales are now up 4.5% from May 2015, when they were 5.29 million. Sales are at their highest annual pace since February 2007, when sales totaled 5.79 million. As you recall, that was right before the 2008 housing industry collapse.

 · Home Depot strengths

Home Depot got a boost this week, partly due the strengthening of the housing market. Nomura Securities upgraded the company to “buy” from “neutral.” Analyst Jessica Schoen Mace said:

“The biggest change in our position from our former thesis is the previous notion that slowing home price growth posed a great risk to Home Depot’s comp. After the [year over year] increase in home price growth slowed to 4.4% and 5.6% in 2014 and 2015 from 13.5% in 2013, Home Depot’s comps were still solidly positive, including a high-single-digit increase in the U.S. in 2015.”

Nomura still expects home prices to decelerate, which is an assumption also held by Home Depot. However, any positive growth would be a tailwind. It is one of several factors that affect the contribution from housing to HD’s sales opportunity, including housing formation, turnover, and aging housing stock, Schoen Mace said.

 · Housing builders enjoyed strong first quarter

KB Homes’ shares climbed this week, partly due to it reporting second quarter earnings that beat estimates. It reported earnings per share of $.17 versus analysts’ estimates of $.14. Revenue was up 30% to $811 million for the quarter.

In reporting earnings, the company’s CEO Jeffrey Mezger said its officials were encouraged by the continued improvement in housing market conditions across the country. Also encouraging is the recent increase in participation from first-time homebuyers, which have historically been KB Homes’ primary customer segment.

The company believes it is well-positioned to leverage its strength in serving the demand from first-time homebuyers with dynamic product offerings. With favorable market trends and progressive financials and operations in the first half of the year, the company believes it has positive momentum for the rest of the year.
Lenner homes, the second-largest homebuilder behind D.H. Horton, also beat analysts’ estimates when it reported second quarter earnings this week. Its EPS came in at $.95 versus analysts’ estimates of $.86. Revenue was up 15% to $2.7 billion.

The company noted a somewhat interesting happening that stifled growth in one city in particular. It said that its decision called “Homebuilding Houston and Homebuilding Other” experienced a decrease in home deliveries in Houston, which was primarily due to less demand driven by volatility in the energy sector.

Federal Reserve Chair Janet Yellen delivered her semi-annual notes to Congress this week, and said housing has continued to recover gradually, aided by income gains and the very low level of mortgage rates.

All of these factors contribute to the rational that there are several long-term investment opportunities for the housing sector right now.

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