Stocks Get A Boost From Housing Activity

The recent rise of U.S. stocks is the highest in a span of more than two months.

One of the biggest contributors to the surge is the stronger-than-expected housing activity.

As an example, CNBC's Evelyn Cheng highlighted the fact that luxury home builder Toll Brothers “closed 8.7 percent higher in its best day since April 23, 2013.”

Cheng explained, “They reported earnings that beat on both the top and bottom line, as the company sold more luxury homes at higher prices, mainly in California. The firm also raised its forecast for home sales.”

Surge Perks

In a Bloomberg feature on the most recent stocks rally, Oliver Renick and Joseph Ciolli noted that the “surge in home sales fueled speculation the economy can withstand higher interest rates amid rising bets the Federal Reserve will tighten policy this summer.”

They added, “Traders are now pricing in a better-than-even chance of a rate increase by July, as Fed officials signaled their willingness to make such a move if the economy shows sustained progress. Odds for a June boost rose to 36 percent from 4 percent last Monday. Along with today’s April new-home sales report, investors will further scrutinize releases on consumer sentiment and GDP later this week for signs of further strengthening.”

Now, what sort of impact do these movements have?

For starters, Renick and Ciolli noted that “an S&P index of home builders hit a three-week high following the jump in new-home sales and Toll Brothers’ results.”

Aside from that, they disclosed that “KB Home soared 7.5 percent, while PulteGroup Inc. and Lennar Corp. gained more than 3.8 percent.”

Builders were said to be “the strongest performers among consumer discretionary stocks,” even when other housing-related companies joined the rally.

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Positive Outlook

In another Bloomberg feature, “U.S. new-home sales surge to highest level in eight years,” Michelle Jamrisko reported, “Commerce Department figures showed on Tuesday, May 24, that purchases of new homes in the U.S. surged in April to the highest level since the start of 2008, pointing to a robust spring selling season for builders.” She pointed out that the “median selling price jumped 9.7 percent to a record $321,100.”

In light of the encouraging figures from the housing industry, Jamrisko stated, “The rebound in purchases of new properties, combined with stronger demand for previously owned homes, signals housing is being energized by healthy employment gains and cheap borrowing costs.”

Moreover, the jump in the number of homes sold and still awaiting groundbreaking indicates that “home construction will help add to economic growth in the second quarter.”

Present Concerns

On the other hand, Reuters markets correspondent Lucia Mutikani observed, “The housing market is being underpinned by a tightening labor market, which is starting to lift wages, as well as still very low mortgage rates. But a shortage of properties available for sale remains a hurdle and house prices have risen faster than wages, sidelining some first-time buyers.”

For his part, Bill Banfield, vice president at Quicken Loans in Detroit, told Reuters, “The spring home buying season is in full swing as builders have been picking up steam through the first quarter. While the large jump in new home sales is encouraging, I would look for a normalization in the coming months that shows a slow but steady increase in the health of the housing market.”

Crucial Indicators

Despite the assurances, there is always room for caution.

Deborah Dian — the stock market and California correspondent for The Daily Voice News — cautioned, “The positive housing news does not completely erase investor fears. The rise in equity prices today was despite the fact that the Fed indicated in the minutes of their April meeting that they could raise interest rates as soon as June — although no final decision has been made.”

She went on to say, “Oil prices have continued to slide due to excess production. OPEC shows no signs of capping production. In Canada, production had dropped temporarily because of the massive forest fire in the oil sands area after the oil camps had to be evacuated. [Recently], they began a phased re-entry of the oil sands camps north of Fort McMurray, Alberta, which means production will begin to pick up in Canada, again. In addition, Iran vowed yesterday to actually ramp up their output even more.”

European Connection and Beyond

Aside from home sales, sharp gains in European stocks also fueled the U.S. stocks surge.

Peter Boockvar, chief market analyst at The Lindsey Group, told CNBC: “Certainly we followed Europe on the weaker euro even though a strong dollar's not really good for U.S. stocks, and obviously the new home sales helped.”

He did add, though, that “much of the gains were ‘noise' and noted the S&P has recently held in a range between 2,040 and 2,100.”

In its daily commentary, Mizuho Bank said, “Such upbeat data have dissipated doubts concerning the recovery in the housing sector. While this strengthens expectations that the Fed may be more comfortable to raise (its) policy rate in summer, markets do not appear to be unsettled.”

Bottom line: The current market situation has raised expectations for a strong recovery in the world's largest economy.

Moreover, as Associated Press business writer Youkyung Lee, put it, “Steady job gains and low mortgage rates have encouraged more Americans to buy new homes in a sign that the housing market and the broader economy are in good shape.”