NEW YORK (Reuters) - Confidence among U.S. homebuilders surged in June, staging its biggest gain since 2002 in one of the strongest signs yet that the housing recovery is gaining traction.
A majority of homebuilders say conditions for new construction are favorable, rather than poor, for the first time since the housing crisis began seven years ago, according to a closely watched index released on Monday.
Executives in the homebuilding industry say a steady rise in home prices, tighter inventories of properties up for sale and a slowing trend in foreclosures have helped the housing market regain its stride over the past year.
Even so, the big jump in confidence registered this month by the National Association of Home Builders/Wells Fargo Housing Market index was surprisingly robust.
Pete Flint, chief executive of online real-estate company Trulia, said conditions were just right for confidence to blossom, with supply of available homes still trailing a rising tide of buying sentiment.
“We are in the early days of a real estate market recovery,” he said. “The supply of homes for sale is still relatively small because sellers are reluctant to list in a rising market. They want to sell at the top.”
The closely watched index jumped to 52 in June from 44 the previous month, handily topping forecasts. The index has risen 23 points from a year earlier.
Readings above 50 mean more builders see market conditions as favorable rather than poor. It was the first time the index has climbed above that dividing line since April 2006. The latest reading was also the highest since March of that year.
And there’s good reason for further bullishness, said Stan Humphries, chief economist from Zillow, an online real estate company, because annualized new home sales aren’t even back to their historical average.
“At this point, I suspect many of the constraints preventing builders from building faster are logistical and land-related versus concerns about future demand,” he said.
Flagging a more robust outlook for profits, the stronger-than-expected data buoyed homebuilder shares. The PHLX Housing Index .HGX closed 1.6 percent higher. Shares of Toll Brothers Inc (TOL.N), one of the largest U.S. homebuilders, and PulteGroup Inc (PHM.N) gained more than 2 percent, while Lennar Corp (LEN.N) rose 0.7 percent.
While the data helped homebuilder shares, investors were mostly focused on whether the Federal Reserve would reinforce its commitment to supporting the economic recovery at its meeting on Tuesday and Wednesday. The market wants clues from the Fed on when it would start cutting back on its $85 billion in bond purchases every month.
Those purchases have stimulated the economy and kept mortgage rates near record lows in recent years. While a recent spike in market rates has raised concerns about the headwinds that might pose to the recovery, home loans remain cheap by historical standards, a trend that bodes well for the market.
But some homebuilders expressed some concern that the housing recovery could falter in the months ahead, especially with interest rates likely to keep rising.
“If interest rates climb, prices start getting high again, the market falls; it’s obvious what’s going to happen,” said Alan Wolff, owner of A.D. Wolff and Associates Inc, a custom homebuilder based in Golden, Colorado. “It was a perfect storm for the recovery.”
Builders could also encounter an additional hurdle if more homeowners and lenders that are holding inventories of foreclosed homes decide to put their properties up for sale.
“The one concern for homebuilders is if other existing home sellers and distressed sellers also decide that it’s a good time to sell, giving the builders more competition,” said Daren Blomquist, a vice president at RealtyTrac, a real-estate research firm, referring to the index’s June surge.
In a separate report, the New York Fed’s “Empire State” general business conditions index came in stronger than expected on Monday.
The index rose to a reading of 7.84 from minus 1.43 in May, topping expectations for zero. A reading above zero indicates expansion.
Even so, weakness in new orders and employment fell to their lowest in five months, indicating activity in the New York state manufacturing sector remained sluggish.
“Sentiment may be improving but actual output isn’t improving,” said Michelle Meyer, senior economist at Bank of America Merrill Lynch in New York.
“This report suggests manufacturing activity is sluggish and that we are seeing that in the U.S. and the rest of the world.”
While the housing recovery has been gaining traction, manufacturing activity has softened, hurt by belt-tightening in Washington and weaker demand overseas.
“Anything on the production side of the economy, including manufacturing, is falling back on the fundamentals. Right now the fundamentals, especially for the global picture, are still fairly soft,” said Sam Bullard, senior economist at Wells Fargo in Charlotte, North Carolina.
Additional reporting by Richard Leong and Michelle Conlin in New York, Sagarika Jaisinghani in Bangalore.; Editing by Chizu Nomiyama and Richard Chang