The Housing Market Index Bodes Well for Homebuilders

When the the National Association of Home Builders/Wells Fargo Housing Market Index climbs above 50, homebuilders begin to expect better times ahead. So investors in that sector got good news on Dec. 17, when word broke that the index had risen to 58. After getting devastated by the 2008-09 recession, the homebuilding industry seems to be clawing its way back to success, and investors in the right companies could do well  in the coming years.

Coming on strong
Homebuilders have not been this confident since July. For the last four months, the housing market index has continued to fall, amid uncertainty caused by the recent government shutdown and potential moves by the Federal Reserve. This month's positive reading is attributed to homebuilders' more optimistic outlook on current sales, future sales trends, and buyer traffic.

For December, homebuilders rated current sales and future sales trends the highest. They were less confident about buyer traffic; although its score did increase by three points to 44, it's still below 50. Ultimately, current sales were most impressive, posting a score of 64 -- a number they previously hadn't reached since December 2005.

Finally growing
For the past five years, the housing market has been slowly recovering after hitting rock bottom in late 2008 and early 2009. The housing market crash not only caused home values to fall dramatically, but also triggered the worst economic recession in more than three decades.  Between summer 2007 and fall 2009, the Great Recession and the housing market burst brought about a dramatic reduction in consumer spending, along with a drop in the stock market, a financial crisis among banks, and a large decline in business investments.  These effects quickly unleashed a string of negative ramifications on the American people.

Businesses cut back their employees, leading to a loss of over 8.4 million U.S. jobs, which prompted family incomes to decline along with some families losing their health coverage.  This led to further mortgage defaults and even more houses being put up for sale by lenders. All of these factors held the economy down, preventing any growth from happening.

However, every storm passes, and slowly the U.S. economy dug itself out of the hole as home prices stabilized. Since then, we have started growing again and the unemployment rate has started coming down. The one thing that still serves as a reminder of what got us into the mess is the stricter lending standards. Fewer people can qualify for a loan today than could before the crash. That being said, those that have been able to make the purchase have likely received a good deal on their home thanks to lower interest rates.

Feeling optimistic
Homebuilders are now feeling better about overall industry conditions after the commerce department reported that the number of Americans desiring to own a new home had risen to 444,000. Before 2008, a healthy housing market was represented by at least 700,000 new home purchases a year.

This latest homebuilder confidence reading signifies that the homebuilders think those days might not be too far away again. According to the National Association of Home Builders, "The growth of new homes built and purchased will create at least three jobs per home along with producing $90,000 in tax revenues." The impact of this will greatly benefit the economy going forward.

Effects on home-building companies
These positive index readings could not have come at a better time for home-builders such as D.R. Horton (DHI -1.74%), PulteGroup (PHM -1.89%), and KB Home (KBH -1.50%). All three companies specialize in construction and homebuilding operations along with providing mortgages and other financial services to assist homebuyers in the purchasing process. Although each company has been slowly growing and gaining momentum over the past three fiscal years, their revenues from home sales are far from where they should be.

D.R. Horton has had the best growth of the group, expanding 12.47% annually for the past three years despite the recession's lingering effects on the housing market. As a side note, D.R. Horton did acquire Breland Home at the end of fiscal 2012 which will help with further growth going forward.

PulteGroup, on the other hand, has at least managed to increase revenues by a small amount on an annual basis. It serves as a contrast to KB Home, as that company's home sales and growth lost ground earning at -5.01% per year for the last three years.

Regardless, all three companies will have to work on building their sales back to where they were before the recession hit. Hopefully, they will be able to do just that as the housing market appears to be headed in a better direction.

Foolish takeaway
Foolish investors would be wise to use the information presented here to perform further research on homebuilders' expectations for the housing market, analyze current market trends, and dig deeper into other metrics for these homebuilding companies.

Keep in mind that the housing market index generated by the National Association of Home Builders' survey is a collection of homebuilders' sentiments; it offers no guarantee that the housing market will act as predicted. Nevertheless, the index score bodes well for all homebuilding companies, suggesting that all three of the builders mentioned above might merit your further investigation.