As mortgage rates rise, subprime loan products are expected to creep back into the lending mix in a more meaningful way.
And that could be a catalyst for homebuilders with high exposure to entry-level buyers, said Sterne Agee analyst Jay McCanless in a research note this week.
He says KB Home (KBH) may be the "best positioned" of homebuilders to benefit from the returning product, which all but vanished after the housing market crashed.
Not only does KB Home cater to first-time buyers, it already has a relationship with mortgage servicer Nationstar Mortgage (NSM), which is one of the companies seen growing subprime product. Another emerging player: Wells Fargo (WFC).
Other builders that should benefit from greater availability of subprime credit are D.R. Horton (DHI), Lennar (LEN), Beazer Homes (BZH), and MDC Holdings (MDC), McCanless said, noting that entry-level homes account for 40% or more of their sales mix.
Los Angeles-based KB Home has long targeted first-time buyers. But as tight credit shut many would-be first-timers out of the market in the last few years, the company has been shifting into the move-up market more. Builders' shift to higher-priced product has left holes in the entry market.
"We have many first-time buyers who are trying to find a foothold in the market," said Geoff McIntosh, co-owner of Main Street Realtors in Long Beach, Calif., which is south of Los Angeles. But supply is tight and new construction in the entry-level market on the coast is "insignificant," he added.
Entry-level buyers made up just 26% of existing home sales nationwide in January, according to the National Association of Realtors. That's down from the 40% to 45% historic norm.
"We anticipate a return of subprime lending could close the gap between the 26% and the historical 40%-to-45% range and potentially lift the gross amount of home sales higher in a given month," McCanless wrote.
KB Home, for one, might finally be in the right place at the right time with its original focus on first-time buyers. Shares have moved up roughly 10% in three days.
- KB Home