Positive Signs for New Home Construction

For homebuilders and those who invest in the homebuilding industry, both fundamental and technical indicators forecast strength in the construction sector going into 2015.

With regard to fundamental indicators, rising consumer confidence and recent labor market gains bode well for future housing demand. The Thomson Reuters Consumer Sentiment Index’s December reading rose to its highest level since its last cyclical peak in January 2007. The survey indicated that consumers anticipate a significant income increase in 2015.

The Bureau of Labor Statistics (BLS) reported that employment expanded by 252,000 jobs in December, and the unemployment rate declined to 5.6% from 5.8% in November. America added 2,952,000 jobs in 2014, compared to 2,328,000 in 2013 and average hourly earnings were up 1.7%.

As Americans get back to work, labor shortages challenge the construction sector, as demand for new homes grows and construction workers are increasingly needed. According to the BLS, the number of open construction jobs for November rose to 145,000. The construction sector is likely to be an important job creator in 2015.

Other fundamentals that predict a strong construction sector performance include reductions in construction costs, the falling cost of lumber and copper, and, most importantly, low interest rates.

Technical indicators also predict a strong likelihood of bullish activity in the construction sector going into the new year. Most, if not all, of the major equity indexes and exchange-traded funds (ETFs) tracking homebuilding performance currently forecast major upside breakouts. By way of example, for the last two years the iShares U.S. Home Construction ETF (ticker: ITB) has been trading in a range with an upper resistance limit of $26 and lower support level of $21. In May 2013, and once again in February 2014, the ETF attempted to break through its $26 resistance level to no avail. However, in early January, ITB finally punched through the $26 resistance level and rallied into the $27 range. ITB’s breakthrough signifies strong prospects for sustained bullish activity throughout the new year.

We are obviously very early in 2015 and it is difficult to predict what effect macro-economic or geopolitical factors may have on the U.S. economy in general or the homebuilding industry in particular, but the current fundamental and technical indicators for the homebuilding business are very positive.