Takeaway: Home sales are up 11% in March versus February, but they are still low historically.
I think there still is a low level of conviction that a housing recovery is underway. Whether you look at the most recently published data from S&P Case-Shiller Home Price Indices, or government data on housing starts and new residential sales for March 2011, these are certainly not the best of times for homebuilders. However, I do not think they are the worst of times either.
For housing sales, my take is that the glass is half full, for existing and new homes that is, since data have been picked up on a month to month basis. As seen in government data for March 2011, new residential home sales rose 11% month to month, but they are still down 22% year over year. The inventory of new homes for sale is 7.3 months at the current sales rate, the recent figure from the U.S. Department of Commerce. The March average sales price was $246,800, roughly flat with the February 2011 data.
So being the optimist, I am of the mind frame that housing will bounce along the bottom this year from weak housing demand, but I think things will post some signs of recovery going into 2012.
I also want to point out that the housing recession has made for record affordability in terms of purchasing a new home, given low mortgage rates, but credit guidelines are much more strenuous than in the past. Last week, mortgage applications rose 5.3%, which was the first increase in four weeks, as prospective homebuyers took advantage of low home prices and low borrowing costs. Mortgage rates for a 30-year fixed mortgage are still just below 5%, but I foresee rates rising from these low levels a year from now.
As everyone knows, location is everything in the housing market. While some local markets are coming back, they are far and few between. Pockets of strength are evident in coastal areas of California and select communities in the Northeast and Mid-Atlantic regions. But I think government data on new homes sales by region, month to month, have not provided any strong conviction of strong versus weak regions. In my opinion, data from the entire spring selling season, which is April through June, will give us a better idea of regional housing trends.
So, what’s a homebuilder to do to get things moving? In the market, we are seeing select price incentives by builders, but few if any in the industry are loading up on “spec” built homes, the ones that are built with the intention of “finding” a buyer. To me, this measure tends to highlight current market conditions and sheds some light on homebuilder sentiment regarding near term housing demand for their home communities.
Lastly, home community building data for the publicly-traded homebuilders, mostly the largest homebuilders, have been trending higher, not lower, over the past six months. Also, land and finished lot acquisitions have trended higher versus a year ago for homebuilders. I think these are good signals that the glass is half full for the housing market. Stay tuned.
In terms of names, I see the following companies being better positioned in this housing market, given strong balance sheets, diversified geography, and experienced management teams: Lennar (LEN 19 ****), M.D.C. Holdings (MDC 29 ****), and Toll Brother (TOL 20 ****). We see these housing companies and one ETF being worst positioned in this housing market, given higher exposure to weak Sunbelt markets, or to exposure to first time buyer markets, which remains weaker than other product categories (adult communities, mid-range, and luxury homes): DR Horton (DHI 12 **), KB Homes (KBH 12 **), Meritage Homes (MTH 26 **), Ryland Group (RYL 18 *), iShares Dow Jones US Home Construction Index Fund (ITB 13 Underweight).
Positive Implications: Lennar (LEN 19.36 ****), M.D.C. Holdings (MDC 28.52 ****), Toll Brother (TOL 20.25 ****)
DR Horton (DHI 11.50 **), KB Homes (KBH 11.80 **), Meritage Homes (MTH 24.60 **), Ryland Group (RYL 16.20 *), iShares Dow Jones US Home Construction Index Fund (ITB 13.42 Underweight)