Home Prices Rising, But Builders Pinched

Posted on by desert345

June 26, 2015

Home Prices Rising, But Builders Pinched

By DONNA HOWELL
INVESTOR’S BUSINESS DAILY

Housing economists weighed in with forecasts Friday in Miami, at a conference by the National Association of Real Estate Editors. View Enlarged Image

U.S. home prices will rise moderately this year and next as demand picks up but inventory stays low, a panel of housing economists said Friday. Rents rising, perhaps faster, are expected to benefit landlords, while homebuilders undergo a continuing profit pinch.

After a 6% gain the last 12 months, home prices should rise 5% both this year and next, predicts Frank Nothaft, chief economist at property analytics provider CoreLogic (NYSE:CLGX).

“By the end of 2017, I think we’ll be back up to the peak where we were in 2006,” he told the National Association of Real Estate Editors (NAREE) conference in Miami, Fla. “But those are nominal prices … in inflation-adjusted terms, prices will still be about 20% below the 2006 peak.”

He sees home sales also rising 5% this year to the highest since 2009.

Homebuying is happening amid stock market gains and better consumer confidence, which hit a 5-month high in a University of Michigan survey out Friday.

Panelists saw a variety of reasons for a low inventory of existing homes for sale. They ranged from owners hesitating to sell because they don’t find a suitable replacement home to reluctance to move after refinancing a mortgage at a very low rate.

Also, large investors who have bought homes are not putting them back on the market, said National Association of Realtors chief economist Lawrence Yun.

Whatever the reasons, the low-inventory phenomenon has an impact on builders, said David Crowe, senior economist at the National Association of Home Builders.

“New-home sales come primarily from existing-home sellers,” he said. “If we’re not getting existing sellers to sell their house, we can’t find someone to buy their new house.”

So “builders aren’t going to build what they think they can’t sell.”

That’s despite a 30-year mortgage rate that Yun expects to end the year at an average of just 4.3%.

Crowe sees single-family housing construction starts rising from 647,000 in 2014 to 726,000 this year and 935,000 in 2016.

He notes that after the housing downturn and recession, when builders braked with the marketplace, their supply chains — from labor to lending — were interrupted .

Now, Crowe says, “builders are seeing a profit squeeze — they’re having to pay higher prices for their land, and they’re having to pay more for labor … and they’re suffering either from no credit or very expensive credit.”

A lack of credit availability through small community banks particularly affects regional and local builders, the NAREE panelists said.

One thing affecting the housing supply is that many existing homes have become rentals, as owners and small investors seek income streams and as the institutional single-family-home buyers that Yun referenced act as landlords.

“We’ve had a big increase in the one-family-home component of the rental stock,” Nothaft said.

“We’ve seen rents rise on single-family homes about 4% this year. … In some markets, double-digit increases in rent and in other markets growth (are) a lot weaker,” he added, citing April data.

Zillow (NASDAQ:Z) chief economist, Stan Humphries, sees rents up more than home prices.

“Rents are rising 4.3% year over year while home prices are up 3.3% year over year (in May),” he said. “We’re very tight in terms of rental vacancies. It’s no surprise why rents are on a tear in this country.”

Humphries says that he continues to be very bullish on rental demand, noting that while some renters will move into homes, millennials and restrained wage growth support the rental market.

“The kid in your basement is not going to go buy a house,” Humphries said. “He’s going to move into rental stock.”

The builder stocks in IBD’s Building-Commercial/Residential industry group are up a collective 10% this year. Three of the five largest by market cap are highly rated by IBD, with a Composite Rating of 89 or better out of a potential 99: Lennar (NYSE:LEN), D.R. Horton (NYSE:DHI) and NVR (NYSE:NVR). Among builders with a market cap of at least $1 billion, two more have a Composite Rating that high: Ryland Group (NYSE:RYL) and Tri Pointe Homes (NYSE:TPH), both with a 91.

Homebuilders rallied after the largest by market cap, Lennar, beat analyst estimates in its second quarter earnings report Wednesday. And Lennar stock rose 5%.

The builder’s gross margin on home sales of 23.8% was down from 25.5% a year earlier.

“Gross margin percentage on home sales decreased primarily due to an increase in land costs, partially offset by an increase in the average sales price of homes delivered,” Lennar said in its report.

KB Home (NYSE:KBH) stock has jumped 16% since its earnings report June 19 that topped analyst estimates. That builder’s gross profit margin came in at 16%, down from 18.9% a year earlier, attributed in the report to “higher land and construction costs, increased pricing pressure in certain markets, start-up field costs associated with new community openings, and an increase in the amortization of previously capitalized interest.”