Homebuilder Confidence Bounces Back; Here's Why Real Estate Stocks Will Too

Tickers in this article: DRI FMCC FNMA LEN MTH NVR PHM RYL

NEW YORK ( TheStreet) -- Homebuilders are getting much more confident about the economy as the summer wears on -- and their stocks should reap the benefits soon.

Homebuilder confidence pierced a pivotal level in July's survey by the Wells Fargo and the National Association of Home Builders, reaching 51 on a 100-point scale for the first time since January, when the polar vortex began cutting into sales. The index measuring today's sales conditions increased four points to 57, while the index measuring expectations for future sales rose six points to 64, the survey said. Traffic of prospective buyers increased three points to 39 on the survey's scale.

Investors should be moving now to consider whether this means building stocks can finally shake off their recent torpor -- most builders have trailed the broader market this year. Earnings reports begin next week, with NVR reporting Monday, followed by Pulte Home , D.R. Horton and Meritage Homes . Ryland Homes delivers numbers on July 31.

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"The builders are still in the third or fourth inning of the recovery,'' Morningstar analyst Jim Krapfel said. "The confidence numbers are encouraging and build on new home sales and permits for May."

The PHL Housing Sector Index is actually down about 1% this year, trailing the 7% jump in the S&P 500 . The case for a bump in housing stocks soon lies in improving jobs numbers, MKM Partners analyst Megan McGrath and Krapfel said. As people get more confident about their prospects, and interest rates remain low, that could be the catalyst for better second-quarter new home orders. Those translate into better earnings later in the year when the homes are delivered.

"A fair number of institutional investors are circling the waters waiting for these stocks," McGrath said. 

Housing stocks are still not worry-free, though.

Institutional players are still waiting for a catalyst to get the stocks moving, McGrath said. The two potential catalysts out there are the broader economy's drive (finally!) toward full employment,  or a 5.5% unemployment rate, and promises by the regulator of Fannie Mae and Freddie Mac to loosen credit , she said.

Credit has been much tighter for housing than for auto loans -- one reason that car and truck sales have virtually recovered to pre-recession levels while home building is still less than half of a more-normal pace, McGrath says. Recent surveys of realtors suggest that conditions haven't improved much, she said. The next step is up to regulators, she said.

The numbers to watch next week are new home orders at major builders, the analysts agreed. McGrath expects orders to rise 7%, blending a weak April and some rebound since. Pulte is likely to see orders decline because it has reduced the number of communities it's building, focusing on boosting profit margins more than volume, she added. But Horton could see orders jump 15%, she said. Lennar Homes , whose quarter ended in May, reported 8% order growth .