Commercial real estate construction companies gaining confidence

Builder sentiment soars above June forecasts as tight inventories lead to higher pricing.

With buyers making a mad dash to take advantage of low mortgage rates, June brings a positive outlook to many developers and commercial lenders that have been waiting on the sideline.

MarketWatch recently reported a significant rise in the National Association of Home Builders/Wells Fargo housing-market index, an indicator of sentiment among home builders. Rising from 44 in May to 52 in June, the 8 point increase is the largest single increase to occur since 2002. In addition, it is the first time since 2006 that the index has risen above 50, generally a sign of optimism among builders.

According to Ian Shepherdson, chief economist at Pantheon Macroeconomics, the improvement to builder sentiment may not indicate good news altogether. He said that the survey results may be the consequence of increased buyer activity in reaction to fears regarding rising mortgage rates.

The builder-sentiment index surpassed last year's levels by 79 percent, and beat economists forecasted sentiment of 45 points, as reported by MarketWatch.

"Builders are seeing better market conditions as demand for new homes increases," said Rick Judson, NAHB's chairman. "With the low inventory of existing homes, an increasing number of buyers are gravitating toward new homes."

Increasing rates bring buyers
The 30-year fixed rate mortgage rate sat at 3.98 percent – the highest its been in 14 months – according to Freddie Mac data. While the measured sentiment does not necessarily match the number of housing starts typical of such confidence, the lean supply may be persuading many first-time homebuyers toward new homes. Builders are able, then, to raise prices in a high-demand environment, as reported by Bloomberg.

"Over the last few years, it's been tough to say that being in a business or an industry that's tied closely to housing is a good thing," Joseph Reitmeier, chief financial officer of Lennox International, said during a recent presentation. "We can actually say that now."

The sales outlook portion of the index improved from 52 to 61 in June. Prospective buyer traffic and single-family home sales also experienced similar hikes. Also, three of the four major regions of the U.S. experienced positive traction in builder sentiment, as well, including the Midwest, West and the South. Confidence in the Northeast, however, cooled in June. Regardless, general improvements to the housing market will benefit the economy. Consequently, even some manufacturers are feeling optimistic, according to Bloomberg.

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