Housing Builds Up U.S. Growth Hopes As China Cools Off

The latest housing data out Tuesday provided more evidence that the sector could drive further growth in the U.S., contrasting with stocks, which continued to sell off over fears of a weaker Chinese economy.

Sales of new single-family homes in July rose 5.4% vs. June to an annualized pace of 507,000, the Commerce Department said. While it fell short of forecasts, it marked a 26% jump from a year ago. The median sale price was $285,900, up 2% yearly.

Separately, the S&P/Case-Shiller 20-City Home Price Index gained 5% year over year in June, up from May's 4.9% rate. Denver, San Francisco and Dallas reported the biggest improvement with increases of 10.2%, 9.5% and 8.2%, respectively.

A report last week from the Commerce Department showed that homebuilders broke ground on 1.21 million new homes in July, the most for the month since 2007. And sales of existing homes rose to pre-crisis levels in July, the National Association of Realtors also said last week.

Lower Rates, Costs

The recent stock market sell-off may add momentum to the housing market, as investors move into bonds, driving yields and mortgage rates lower.

"I think that's huge," FBN Securities analyst Joel Locker told IBD. And if jobs growth kicks in, it could be a powerful boost for housing, he added.

While he's neutral on the homebuilding sector, Locker said "it's one of the only industries in the country that is growing in the the low double digits. So many are stuck in single digits.

Slowing economic growth in China has also weighed heavily on commodity prices, keeping a lid on costs to homebuilders.

But in a reminder that progress can be uneven, top U.S. luxury homebuilder Toll Bros. (TOL) reported weak fiscal third-quarter results Tuesday, as lackluster economic growth earlier this year pushed home prices down.

Earnings fell 32% to 36 cents a share. Excluding one-time items, Toll Bros. earned 44 cents a share, according to Thomson Reuters. Analysts expected EPS of 49 cents. Revenue slid 2.7% to $1.03 billion, missing forecasts for $1.06 billion.

Shares sank 7.8%, following the broader market down as it staged a sudden reversal. Other builders fared a bit better. Lennar (LEN) ended down 3.8%, PulteGroup (PHM) 3.6%, D.R. Horton (DHI) 4.2%, and KB Home (KBH) 2.8%.

Still, Toll Bros. raised its full-year margin guidance 20 basis points to 26.2% and sees continued expansion in 2016.

"We believe we have significant room for growth and additional profitability in calendar 2016 and beyond," CEO Douglas Yearley said in a conference call.

He also noted there is pent-up demand among buyers, and current industrywide production is improved but still well below the industry norm. "This housing recovery appears to be built on a very solid foundation."