Builder Confidence

25April

U.S. Home Builder Focuses on Entry-Level Homes

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The current housing market’s supply of homes continues to be tight with the majority of homes available for sale being higher-end properties.  This leaves those who would be first-time homebuyers with fewer choices.  But the nation’s largest home builder (by market value), DR Horton, is shifting its attention from high-end homes to building entry-level residences.

The company’s new line of homes, Express Homes, will start at $120,000-$150,000 and will be be rolled out in Texas, Georgia and Florida.  Executives of the company see a strong demand for this market segment that is lacking in supply.  D.R. Horton CEO Donald Tomnitz said, “We wouldn’t be getting into Express Homes if we didn’t think it was the next segment of the market to recover… As we move into this recovery we’ll see some encouragement from the government in terms of trying to get more people into entry-level homes.” Pictured above is an Express Home in Dallas, TX and below is another located in Houston, TX.

101611500-ExpressHouston_530x298Outside analysts also see this shift in the market place.  Stephen East from research firm ISI Group commented, “We view it as the right move. Horton’s cost structure and operational experience at the entry level makes them one of the few builders that can do this profitably. Also, we are firmly convinced the first-time-buyer segment is getting access to more credit, which will lead to more demand for this low-entry level product.”

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4April

Housing Market Thawing Slowly as Supply Increases

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The Federal Reserve’s recent two-day policy meeting painted a picture of sluggish growth in the economy for the first quarter of the year, mostly attributed to colder than normal weather which hindered economic activity.  Federal Reserve Chair, Janet Yellen, commented on labor conditions being tougher in some ways now than in any other recession and stressed the Fed’s “extraordinary commitment” to aid recovery in the form of massive bond-buying and super-low interest rates for some time to come.  The economic data has not been improving as quickly as many would have hoped for but there have been some positive reports that still point to a rebound.  This should have a positive impact on the housing market.  It’s time to put the first quarter behind us now and look for signs of growth during the second quarter in jobs, home supply, and home prices.

The U.S job’s report released Friday helped paint a brighter picture for the coming months.  The economy added 192,000 new jobs during March and the unemployment rate held at 6.7 percent according the Bureau of Labor Statistics.  These numbers came in around consensus but still do not point to a robust rebound.  Kathy Bostjancic, director of macroeconomic analysis at The Conference Board, said, “Undoubtedly, there was some catch up in hiring following the inclement weather this winter.  Still, the underlying hiring trend is encouraging, with more good news expected this spring and summer.”  As the employment picture brightens up, this will help strengthen the housing market as more people will look to purchase homes.

Housing supply has been on the rise since January, an important factor in getting the housing market to thaw out and eventually start booming.  The noted monthly supply in February was up slightly from January’s five month supply, citing 5.2 months of supply.  Six months of supply is considered a healthy housing market.  As more homes are built to increase inventory numbers, analysts believe this will help spur growth in the housing market.  Homeowners looking to sell their property will have an easier time looking for a new residence, which should encourage sales and purchases.

Case-Shiller Price IndexAs discussed in previous blog posts, the continued increase in home prices have made this a seller’s market, but have priced some potential buyers out of the market.  While prices have continued to grow, they are increasing at a decreasing rate (January noted a slight drop of 0.08% in the Case-Shiller 20 City Home Price Index). This points to a possible retreat in gains, reflecting a more normal range in prices over the next few months.  This will open the door to more market participants and will help get some momentum behind the housing market.

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13March

Housing Geared Up to Grow this Spring

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The mercury is rising and springtime is just around the corner.  Regions hit hard by winter storms are starting to thaw and analysts are predicting the housing market will do the very same in coming months.  A tight housing supply continues to keep home prices high making this undoubtedly a seller’s market.  The overall housing market for the year is positioned for continued growth.

Housing industry and home construction real estate concept as two gears or cog wheels shaped as family residential structures as an icon of neighborhood cooperation and community network connections.Demand for housing is still strong and expected to stay this way through the spring according to some analysts.  The Conference Board, a nonprofit association of businesses, found the percentage of consumers who intend to buy a home within the next six months is the highest it has been since 2000.  One reason for this rising demand is young people who are still facing a tough job market.  A housing analyst with Moody’s Analytics predicts the economy will expand enough this year to enable these young people to move out of their parent’s home.  While they may mostly rent, a decrease in vacancy rates should put upward pressure on rental prices prompting interested home buyers who currently rent to make a real estate purchase.

The rise in home prices is great news for millions of homeowners who have been underwater on their mortgage.  Rising values should encourage owners to put their property on the market, helping to ease the tight housing supply.  CoreLogic reported almost 3.5 million homeowners were lifted out of negative equity between the end of 2012 and mid 2013.  Zillow estimated even more borrowers are back above water, citing 3.9 million homeowners.  Chief Economist Stan Humphries, of Zillow stated in a recent release, “We’ve reached an important milestone as negative equity has fallen below 20 percent nationwide, which has helped free up marginally more inventory and contribute to further stabilization of the market.”

During the past year, existing home and condo sales have increased 11 percent almost topping the highest level in four years.  The National Association of Realtors (NAR) predicts sales will remain about the same during this year.

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22January

The Housing Market in 2014

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It is the start of a new year which comes with  new predictions of what the housing market will experience over the course of the next 12 months.  A look back at the housing market in 2013 showed a road to recovery, albeit slow.  Forecasts for 2014 don’t seem to be overly optimistic so far. Pressure from higher interest rates, more rigorous credit qualification standards, and tight housing supply make the 2014 outlook a more challenging one.

HousingMarketWeak residential mortgage origination results  for  the fourth quarter were recorded  by Wells Fargo and JP Morgan Chase. Therefore analysts expectations for 2014 are being revised downward.  The Mortgage Bankers Association (MBA) lowered its mortgage origination projections for 2014 by $57 billion to $1.12 trillion.  Mike Fratantoni, chief economist for MBA, commented, “Despite an economic outlook of steady growth and a recovering job market, mortgage applications have been decreasing—likely due to a combination of rising rates and regulatory implementation, specifically the new Qualified Mortgage Rule.” A large portion of the reduction is refinance applications which are now estimated to decrease 60 percent this year from last year.

Mortgage rates are expected to rise above 5 percent this year which could put further pressure on the housing market.  The MBA has lowered its 2014 projections relating to purchase originations to $677 billion down from $711 billion that was previously forecast.  All-cash purchases still make up 32 percent of the housing market according to November readings from the National Association of Realtors (NAR).  This number is up from October.

Home builder confidence fell in January following a steep rise in December.  “Rising home prices, historically low mortgage rates and significant pent-up demand will drive a continuing, gradual recovery in the year ahead.  However, the pace of the recovery could be stronger were it not for rising construction costs and inaccurate appraisals that are keeping some home sales from going through,” said NAHB Chief Economist David Crowe.

There is some good news surrounding the housing market according to Patrick Newport of IHS Global, “Builders are facing the headwind of rising construction costs, but buyer traffic has held up well despite rising mortgage rates. After hitting a plateau in the middle of 2013, the market for new homes is poised for a stronger 2014.” It will be interesting to see how the housing market adjusts throughout the year and whether or not it ends up stronger than 2013.

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22November

Mortgage Applications Dwindle

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Prospective Fed Chairman, Janet Yellen, continues to ensure members of the Senate Banking Committee that she favors robust QE measures until the economy and labor market can exhibit strong growth.  She told the panel on Thursday “I consider it imperative that we do what we can to promote a very strong recovery.”  This has helped to send the equity markets soaring to new record highs but strong improvements elsewhere remain to be seen.  While the Fed believes the asset purchases have been nursing the economy back to health, the housing market has flat-lined or in some cases started to retract.

Mortgage Applications DropNotably in housing, mortgage applications continued to dwindle from the prior week’s report.  Applications dropped 1.8 percent according to the Mortgage Bankers Association (MBA) for the week of November 8th.  The prior week’s report was revised down from -7 percent to -2.8 percent.  These numbers come of the heels of a higher 30-year average fixed mortgage rate for conforming loans of 4.44 percent compared to 4.32 percent in the prior week.  The 30-year fixed mortgage rate averages for Jumbo loans and FHA backed loans also experienced increases that reached monthly highs.

Home builder confidence was reported flat due to rising construction costs this month.  The recent spike in interest rates over the last few months has hurt mortgage applications and construction costs are affecting the housing supply.  Other factors besides interest rates are influencing home buyers.  Rick Judson, NAHB Chairman, said in a release, “Given the current interest rate and pricing environment, consumers continue to show interest in purchasing new homes, but are holding back because Congress keeps pushing critical decisions on budget, tax and government spending issues down the road.”

The number of people looking to purchase a home dropped half a percent according to the purchase index put out by the MBA which is typical in a rising rate environment.  Interest rates are still historically low but the continued uncertainty from the Fed and Washington will continue to keep home buyers on the sidelines until more clarity can be seen.  The high unemployment numbers also add to the problem.  Inevitably this will hurt mortgage application numbers as home buyers sit on the sidelines.

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31October

Construction Spending and Home Prices Take Off

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construction spendingHomebuilder sentiment was recently reported to be weakening, but U.S. spending on construction isn’t being held back by this news.   During the month of August, construction spending almost hit a 4-1/2 year high due to increases from both the private and public arenas, according to the Commerce Department.  The increase was .6 percent when compared to the month of July.  July’s figures were revised to a number more than double the original estimate.  These positive numbers show that there’s hope for growth in the third quarter this year.

Some may think this data seems a little dated, as we are nearing the end of October.  The government shutdown delayed the original release of this data, scheduled for October 1st.  The private sector of construction spending increased by 1.2 percent to a five-year high leading the market to believe higher interest rates have not lowered builder confidence, nor has it slowed activity as previously assumed.

With lots of money being spent on building new homes (increasing supply) theory would imply prices would start to cool, but this has not been the case.  Home prices have jumped more than 12 percent from a year ago making the affordability of buying a home more difficult.  Household income growth, up only 3 percent year-over-year, has not kept up with the rise in home prices.  Lawrence Yun, chief economist for the National Association of REALTORS® wrote in the September Sales report, “Affordability has fallen to a five-year low, as home price increases easily outpaced income growth.  Expected rising mortgage interest rates will further lower affordability in upcoming months.”

For home buyers this could be a challenging environment.  First time buyers tend to purchase lower-priced homes.  If income growth is not keeping pace with home prices, they could get priced out of the market and be forced to put off their home purchase for the time being. The glimmer of hope in this situation is that fixed mortgage rates have dropped to a four month low (30-year fixed rate is 4.13 percent this week).  This helps take a little pressure off the increasing home prices in regards to home affordability.  In the long term if incomes don’t keep pace with home prices, construction spending may start to decline due to a lack of demand.

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21October

Government Re-opens But Builder Confidence Drops

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After days of meetings, discussions and negotiating, the government finally came to a short-term resolution to allow the government shut-down to conclude and ensure default would not ensue.  But this “my way or the highway” mentality on both sides of the political isle has damaged Washington’s credibility and confidence ratings among Americans.  The lack of leadership in Washington and the “kicking the can down the road” ideology has affected several parts of the economy; both macro and micro in scope.

Reports released this Wednesday from the National Association of Home Builders (NAHB) showed a weakening in home builder confidence.  In the market for new single family homes, the NAHB/Wells Fargo Housing Market Index (HMI) reflected a two point drop from an already downward revised report in September.  NAHB Chief Economist David Crowe noted, “A spike in mortgage interest rates along with the paralysis in Washington that led to the government shutdown and uncertainty regarding the nation’s debt limit have caused builders and consumers to take pause.  However, interest rates remain near historic lows and we don’t expect the level of rates to have a major impact on sales and starts going forward. Once this government impasse is resolved, we expect builder and consumer optimism will bounce back.”

Builder ConfidenceThe NAHB describes the HMI as a an index that “gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor.”  The survey also asks builders to rate traffic of prospective buyers as “high to very high,” “average” or “low to very low.” Scores from each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good than poor.”  Current sales, sales expectations and traffic of prospective buyers all experienced a two point drop showing confidence is waning.

It appears that home builders aren’t the only ones lacking confidence.  Consumers are showing signs of caution in the midst of Washington’s uncertainty.  Last week during the partial shut-down, mortgage applications for government mortgage products dropped to a six-year low according the Mortgage Bankers Association (MBA).  Mortgage applications to purchase a home declined by 5%.  “The government shutdown had a notable impact on the mortgage market last week. Purchase applications for government programs dropped by more than 7 percent over the week to their lowest level since December 2007, and the government share of purchase applications dropped to its lowest level in almost three years. FHA lenders with delegated authority have been able to continue, but those that rely on the regional homeownership centers have not. Additionally, HUD staff at headquarters are generally furloughed and not able to answer questions,” said Mike Fratantoni, MBA’s vice president of research and economics.

It will no doubt take time to re-instill confidence that the American people had in their government’s elected officials.  The negative impact of these past few weeks might haunt the economy and consumers for some time.

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Sources:  http://www.nahb.org

http://www.mbaa.org/NewsandMedia/PressCenter/85948.htm