Making Sense of a Complex New Home Market

Real Estate

The latest data on homebuilder confidence indicates inflated gasoline prices have sucked the wind right out of a vulnerable, though prospective, spring selling season. However, we reiterate, the shares of publicly traded homebuilders should be less than perfectly positively correlated to the Housing Market Index.

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Making Sense of a Complex New Home Market

Earlier this year, builders had shown speculative enthusiasm, based on their view of the six-month forward outlook. However, based on more recent data released by the NAHB, it seems that prospective glimmer of hope is dwindling. The reason for dreams unfulfilled seems to be significantly higher gasoline and other energy prices, which have put the stops to many consumer spending decisions, including the big ticket new home purchase.

The National Association of Homebuilders’ (NAHB) Housing Market Index marked 16 in May, the same depressed level reported over six of the last seven months. An interesting aspect of the NAHB’s Index is that within it, components of its measurement have moved in different directions. While high hopes for something resembling recovery have faded through the first half of this year, actual potential buyer traffic has improved. The problem is that the net sum of all affairs is still a pitiful state.

The index measuring sales expectations for the next six months fell 2 points, to a measure of 20, while the metric covering traffic of prospective buyers gained a point, to inch its way to 14 on the NAHB’s scale. By the way, anything below 50 indicates that more builders view sales conditions as poor versus good. Clearly, while sitting this far below the bar, it’s a commonly shared viewpoint.

The concerns of builders in May covered all the same complaints about the operating environment mentioned over past months. Contractors talked about capital access constraints for both builder production and borrower qualification. They continued to blame a flawed appraisal process, which takes into account distressed property sales, thus skewing appraisal prices lower. As a result, prospective buyers are not able to get what builders believe is true value for the home they are leaving. This of course violates all free market truths. Distressed property inventory also weighs on the contractor’s marketplace opportunity by putting his properties into competition with cheaper options.

A couple new complaints surfaced this month indicative of an exhausted government that’s been worn out by the length of this burdensome economic weakness. Builders complained about the decreasing likelihood of any further government assistance to the industry. This has come into context this year especially, as comparisons against First-Time Homebuyer Tax Incentive assisted sales from last year have fared poorly. Secondly, builders raised concerns about the rising price of gasoline, which they feel is helping to price the prospective homebuyer on the margin out of home ownership. The two-point decline in the West Regional Index (to 16), where gasoline prices tend to be highest, would support that theory.

Northeastern builders seem to be faring worst of all, likely due to their operation in a well-developed market full of cheap existing homes. The Northeast Index fell 5 points in May, to 15. The Midwest saw no change, though stuck at a low measure of 14. The South improved a point on its way to 16.

Now that we’ve painted the bleak outlook builders seem to share, we reiterate that many of the publicly traded builder’s shares remain especially sensitive to positive news. As the real estate market is expected to grow this year, though off dead-bottom, it remains my view that the stocks of well capitalized, nimble builders will be early beneficiaries of new home growth both before and when it develops. And I reiterate that the NAHB survey is weighed on by its inclusion of a great number of smaller, undercapitalized builders, many of which may never recover. Thus, the movement of homebuilder shares and the Housing Market Index should be far from perfectly positively correlated.



Editor's Note: Article should interest investors in Investors Title (Nasdaq: ITIC), Bank of America (NYSE: BAC), Freddie Mac (OTC: FMCC.OB), Fannie Mae (OTC: FNMA.OB), Goldman Sachs (NYSE: GS), Morgan Stanley (NYSE: MS), Wells Fargo (NYSE: WFC), Toronto Dominion (NYSE: TD), UltraShort Real Estate ProShares (NYSE: SRS), Ultra Real Estate ProShares (NYSE: URE), ING Clarion Global Real Estate Income Fund (NYSE: IGR), Xinyuan Real Estate Co. (NYSE: XIN), Rydex Real Estate Fund H (Nasdaq: RYHRX), T. Rowe Price Real Estate Fund (Nasdaq: TRREX), Toll Brothers (NYSE: TOL), Hovnanian (NYSE: HOV), D.R. Horton (NYSE: DHI), Beazer Homes (NYSE: BZH), Lennar (NYSE: LEN), K.B. Homes (NYSE: KBH), Pulte Homes (NYSE: PHM), NVR Inc. (NYSE: NVR), Gafisa SA (NYSE: GFA), MDC Holdings (NYSE: MDC), Ryland Group (NYSE: RYL), Meritage Homes (NYSE: MTH), Brookfield Homes (NYSE: BHS), Standard Pacific (NYSE: SPF), M/I Homes (NYSE: MHO), Orleans Homebuilders (AMEX: OHB), Vanguard REIT Index ETF (NYSE: VNQ), PNC Bank (NYSE: PNC), J.P. Morgan Chase (NYSE: JPM), Hooker Furniture (Nasdaq: HOFT), Ethan Allen (NYSE: ETH), Pier 1 Imports (NYSE: PIR), Williams Sonoma (NYSE: WSM), Home Depot (NYSE: HD), Lowes (NYSE: LOW), Nasdaq: XNFZX, Nasdaq: FSAZX, Avatar Holdings (Nasdaq: AVTR), Apartment Investment & Management (NYSE: AIV), Equity Residential (NYSE: EQR), Avalonbay Communities (NYSE: AVB), UDR Inc. (NYSE: UDR), Essex Property Trust (NYSE: ESS), Camden Property Trust (NYSE: CPT), Senior Housing Properties (NYSE: SNH), BRE Properties (NYSE: BRE), Home Properties (NYSE: HME), Mid-America Apartment (NYSE: MAA), Equity Lifestyle Properties (NYSE: ELS), American Campus Communities (NYSE: ACC), Colonial Properties (NYSE: CLP), American Capital Agency (Nasdaq: AGNC), Sun Communities (NYSE: SUI), Associated Estates (NYSE: AEC), PennyMac Mortgage (NYSE: PMT), Two Harbors (AMEX: TWO), Simon Property Group (NYSE: SPG).

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