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The latest data from the U.S. Census Bureau shows that housing starts declined more than 9 percent in June, falling well below the market's expectations. Meanwhile, stocks tied to the residential construction sector lost value after several companies released disappointing quarterly earnings reports.

The Wall Street Journal noted that this group included some of the major players in the industry, such as D.R. Horton, the nation's largest homebuilder. The company announced earlier this year that it is shifting its focus to smaller homes in the $120,000 to $150,000 range. As it continues the rollout of its Express Homes brand, D.R. Horton may be able to attract more interest from discouraged buyers, creating opportunities to increase its market share and revenue. However, MarketWatch contributor Tomi Kilgore noted that "Wall Street didn't appreciate the company's new strategy of focusing on increasing unit sales over maintaining profit margins."

Several other builders are reportedly pursuing similar strategies. PulteGroup announced major gains for its lower-priced Centex brand on a call with investors, although its earnings also fell short of expectations. The strong performance from Centex stems in large part from the booming economy in Texas, where the company's activity is concentrated, but CEO Richard Dugas said "the entry level does appear to be improving in other markets as well."

First-time buyers' share of the market has fallen dramatically since the early 2000s boom, when that figure exceeded 25 percent. The National Association of Home Builders (NAHB) estimates that first-time buyers will only account for about 17 percent of new home sales this year. Some builders told the media that they are seeing signs of a recovery among first-time buyers. However, these trends proceed at a different pace in every market and Barclays analyst Stephen Kim told the Journal that "not everyone's going to see it at the same time."

The efforts of certain builders to meet demand at the lower end of the single-family market stand in contrast to the industry-wide trend toward high value development, which has been driven by both consumer demand for larger homes and financial institutions' interest in funding larger projects. Data from the Commerce Department shows that the share of new homes priced below $200,000 continued to decline in recent years.

Despite challenges, builder confidence index at six-month high

Despite the drop in construction starts and disappointing earnings data, firms expressed higher confidence in the most recent monthly survey conducted by the NAHB. Chairman Kevin Kelly noted that the organization's builder confidence index rose above 50 for the first time since January, which he called "an important sign that it is strengthening as pent-up demand brings more buyers into the marketplace." NAHB Chief Economist David Crowe said he attributes the positive sentiment to trends in the broader economy, especially the growth in employment opportunities.

"An improving job market goes hand in hand with a rise in builder confidence," Crowe said. "As employment increases and those with jobs feel more secure about their own economic situation, they are more likely to feel comfortable about buying a home"

Writing for the Motley Fool, Joseph Hogue even questioned the meaning of the June drop in housing starts. Noting that the drop in the national figure was the result of a large decline in the South, Hogue suggested that the data may reflect an aberration in reporting, rather than a downturn in construction activity.

At the same time, other commentators have expressed a more conservative outlook. Sterne Agee chief economist Lindsey Piegza released an analysis highlighting the myriad challenges that still confront the housing market, from low wage growth to higher prices and interest rates. She concluded that although "sales activity has picked up in recent months after a lackluster first quarter, home builders remain cautious amid a still uneven recovery."

Labor shortage hits builders' basic needs

Survey data from the NAHB shows that a key factor complicating builders' efforts to scale up their operations is a labor shortage within the industry that is putting upward pressure on construction costs. According to the NAHB, this is more of an issue with subcontractors than workers who are employed directly. As a predictable consequence of this imbalance, costs are rising faster for builders that rely on more subcontractors, although labor costs are up across the board.

Shortages are also reportedly more prevalent for workers with basic skills, such as carpenters, masons and framing crews. The difficulty builders are having finding workers to complete these fundamental tasks could have a significant impact on overall construction costs, both for new properties and replacement structures. As the NAHB notes, these workers are needed in large numbers at the outset of new residential construction projects.

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