Home Builders Continue to Think Happy Thoughts

Despite a sluggish economy and high levels of unemployment, home builders are feeling more optimistic. On Tuesday, the National Association of Home Builders announced that its housing market index jumped more than expected in May.

According to the report, the builder confidence index increased five points from 24 in April to 29 this month. It beat estimates of 26 by economists and was the highest sentiment among home builders since May 2007. “Builders in many markets are reporting that buyer traffic and sales have picked back up after a pause this April,” said Barry Rutenberg, the trade group’s chairman. “It seems we have resumed the gradual upward trend in confidence that started at the beginning of this year,” according to Bloomberg. However, the index is still well-below 50. A reading above this level indicates that builders in general view conditions as good rather than poor. The index has not been above 50 since April 2006.

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As the chart below from Zero Hedge shows, the recent rise in the index is still a small blip in the bigger picture. Furthermore, sales of new one family houses still remain at depressed levels, signaling that the high levels of confidence could be reigned in soon, along with home builder stocks. On Wednesday, new data showed that building permits also dropped 7 percent to 715,000-unit pace last month.

Shares of several home builders closed higher after the improved confidence index reading and continue to be a bright spot for investors in 2012. PulteGroup Inc. (NYSE:PHM) and Toll Brothers Inc. (NYSE:TOL) shares both increased about 1.7 percent. Meanwhile, DR Horton Inc. (NYSE:DHI) and Lennar Corp. (NYSE:LEN) jumped 2.54 percent and 2.78 percent, respectively. Home Depot Inc. (NYSE:HD), an American retailer of home improvement and construction products, was one of the few house-related stocks to decline on Tuesday.

Home Depot reported disappointing financial results for the first-quarter. The home improvement retailer beat the mean analyst estimate on earnings per share, but missed on revenue figures. It saw a slowdown in sales in April after the increase in sales earlier in the year due to unseasonably warmer weather. Sales for the quarter climbed 5.9 percent to $17.81 billion, but analysts expected $17.96 billion. “The sales miss could be linked to a mediocre increase in the average transaction value, which suggests continued so-so sales in big-ticket merchandise categories and a heavy influence from seasonal products,” said Brian Sozzi, chief equities analyst at NBG Productions. Shares of the company closed 2.43 percent lower, but have gained almost 16 percent year-to-date.

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