Did Homebuilders Just Receive a Reality Check?

After reaching multi-year highs, confidence among U.S. homebuilders unexpectedly dropped in February. The surprise is causing a quick reality check among housing-related stocks.caution

The National Association of Home Builders/Wells Fargo builder confidence for newly built, single-family homes dropped to 46 this month, compared to January’s 47 reading, which was the best level since April 2006.

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It was the first drop in almost a year and the first miss since April 2012. The median forecast in a Bloomberg survey of 50 economists expected the confidence index to increase to 48. Readings under 50 indicate more respondents think conditions are poor. The index was first published in 1985, and averaged 54 in the five years leading up to the recession.

“Following solid gains over the past year, builder confidence has essentially leveled out and held in the same three-point range over the last four months,” noted NAHB Chairman Rick Judson, a home builder from Charlotte, N.C. “This is partly due to ongoing uncertainties about job growth and consumer access to mortgage credit, but it’s also a reflection of the fact that builders are now confronting rising costs for building materials and, in some markets, limited availability of labor and lots as demand for new homes strengthens.”

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As the chart above shows, homebuilder stocks declined across the board on the news. Toll Brothers (NYSE:TOL), the largest U.S. luxury-home builder, fell 1.5 percent in afternoon trading. Lennar (NYSE:LEN) and KB Home (NYSE:KBH) both declined about 1.7 percent, while DR Horton (NYSE:DHI) and PulteGroup (NYSE:PHM) both dropped more than 2 percent.

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