By Caroline Valetkevitch and Sinead Carew
(Reuters) - Housing stocks rallied on Friday and the industry group should get more good news next week, though sustained and robust future gains may depend on wage growth and other signs of improving home affordability.
On Monday, the National Association of Realtors is expected to report strong growth in existing home sales for May. On Wednesday, Lennar (N:LEN), the No. 2 U.S. homebuilder is expected to report that it had a strong second quarter.
The housing recovery has been uneven. U.S. permits for future home construction surged to a near eight-year high in May, a sign of a buildup of momentum, but housing starts fell.
Permits were driven by multifamily construction plans, which jumped 24.9 percent, while single-family permits, the largest share of the market, increased only 2.6 percent.
Broadly, shares of housing stocks have reflected this. Building materials companies have fared better than single-family home builders as materials companies have benefited from multi-family housing construction aimed at renters.
Construction materials supplier Vulcan Materials (N:VMC) has risen 35.8 percent so far this year and home improvement and building products firm Masco (N:MAS) is up almost 10 percent.
Even with a 2.3 percent gain on Friday, the S&P 500 homebuilding index <.SPLRCHOME> is up just 3.7 percent for the year. The broader PHLX housing index (HGX), including builders, building products and mortgage companies, is up 7.8 percent for 2015 but down 2.7 percent from its 2015 high hit in early April.
Wage growth may be key to better performance in future, as affordability remains an issue.
The median home became less affordable for the median family between April 2014 and April 2015 as prices rose with demand but new home construction did not, according to the latest data from The National Association of Realtors.
Furthermore, average new home prices seem out of reach of first-time buyers. Millennials, those born after 1981, are entering the market more slowly than their predecessors. Only 34.6 percent of millennials now own homes. This is the lowest percentage for U.S. residents under 35 since the Census bureau started releasing age-related ownership statistics in 1982.
Entry-level buyers cannot afford new homes because builders are concentrating on constructing higher-end houses that are out of their price range rather than building so-called starter homes, according to Alex Barron, founder and senior research analyst at Housing Research Center in El Paso, Texas.
As a result sales volume is about half where it should be, making home builder stocks less attractive, Barron said.
"If you start seeing the unemployment rate come down with a broad swath of jobs being created, it should be positive for the housing stocks," said Quincy Krosby, market strategist at Prudential Financial (NYSE:PRU), which is based in Newark, New Jersey.
Next week's data is expected to show existing home sales climbing 4.4 percent in May after falling 3.3 percent in April.
New home sales are seen rising 1.5 percent on top of April's 6.8 percent increase, based on Reuters' polling. New home sales data is set for release on Tuesday.
Lennar is expected to report an 11 percent increase in revenue and an almost 7 percent increase in earnings per share.
The other S&P 500 homebuilders - D.R. Horton (N:DHI) and PulteGroup (N:PHM) are expected to post sharp gains in quarterly earnings from a year ago, Thomson Reuters data showed.
Shares of homebuilders jumped on Friday after KB Home (N:KBH) posted stronger-than-expected quarterly earnings and revenue as it sold more homes at higher prices. KB Home's shares rose 9.4 percent and hit a five-month high.
That earnings-bolstered bump may not last unless the market improves more fully, which may take two years or more, said John Augustine, chief investment officer at the Huntington Trust in Columbus, Ohio.
"The best scenario is that the stock market keeps moving up, the baby boomers retire and the millennials get their jobs,"
said Augustine.