Homebuilding Demand Heats On Brighter Economic Picture

Investor's Business Daily

The polar vortex may be causing frigid temperatures in parts of the U.S. now, but it shouldn't stop business from heating up for the nation's homebuilders once they kick off their key spring selling season in the days after Super Bowl Sunday.

A shortage of houses for sale, an economic growth spurt, rising home prices and a brighter jobs picture will likely set the stage for strong building demand and busy construction crews this year. That's despite a nearly 9% drop in pending sales of existing homes in December, blamed partly on cold weather and higher mortgage rates.

Real estate experts paint this picture for the new-homes market:• Housing starts will rise sharply.

New-home sales will rise too.

The pace of job growth will pick up along with the economy, fueling new-homebuyer confidence.

Home prices will keep rising, but at a slower pace than in 2013.

New housing formation is also on the rise, helping drive already pent-up demand, and interest rates are expected to edge up, but not enough to dissuade homebuyers.

"We are optimistic about homebuilding in 2014 and 2015," said Robert Denk, chief economist for the National Association of Home Builders. "The labor market and the broader economy are getting better, slowly but surely. And after a five-year drought the housing market has made steady progress through 2012 and 2013. We expect this to continue in 2014 and 2015.

Rising home prices, he adds, "have taken the fear out of the marketplace, and are steadily offering some relief from underwater mortgages. Buyers of new and existing houses are no longer paralyzed by declining prices.

Big Builders Shine

Judging by some results this week, business has already heated.

Homebuilders PulteGroup (PHM) and Ryland Group (RYL) delivered better-than-expected profit in quarterly reports Thursday as IBD's Building-Residential/Commercial industry group edged up, continuing the trend for nearly a 9% rise this week.

Pulte, the second-biggest builder by market cap after Lennar (LEN), posted fourth-quarter earnings of 57 cents a share, up from 34 cents a year ago and 13 cents over views. Revenue rose 6% to $1.67 billion, slightly below views. Top-line growth was driven by a 13% gain in average selling prices to $325,000, helping offset a 4% drop in closings.

Pulte stock rose nearly 2% and CEO Richard Dugas described a bullish outlook for 2014.

"We expect the rebound in housing to continue, supported by many of the factors that first launched the recovery, including low interest rates, a limited supply of new and existing homes, and an ongoing, albeit modest, recovery in the broader economy," he said.

Quarterly revenue at two other builders, Ryland and Beazer Homes (BZH), beat views Thursday, and Beazer showed a smaller-than-expected loss. But the stocks fell nearly 1% and 4% respectively.

The nation's largest builder by sales, D.R. Horton (DHI), beat views in its own quarterly report Tuesday.

"In January, and especially this last week ... our sales have been better than I had expected and I am excited about where we are," said Horton's CEO Donald Tomnitz on the first-quarter conference call. "I feel like we're right on the cusp of a strong spring selling season — and from my own personal perspective, I think the spring selling season has started a little early for our company, and that's a very positive thing that I'm seeing.

Recent data confirm the stars are aligning for what could be a solid year for homebuilders: An estimated 923,400 housing units were started in 2013, up 18.3% over 2012, the Commerce Department said.

Existing-home sales for 2013 jumped 9% to 5.09 million, the highest since 2006, the National Association of Realtors says. The 2013 median existing-home price rose 11.5% to $197,100, the top gain since 2005. The momentum should continue in 2014: the NAR forecasts a 5.4% rise in existing-home prices to $207,700 in 2014. It forecasts new-home sales rising 29% this year to 550,000.

Room To Grow

Lawrence Yun, the NAR's chief economist, sees a nearly 30% jump in housing starts — to about 1.2 million units — in 2014, momentum that will "probably carry" into 2015. It would still be below the historical average of 1.5 million units, implying more homes are needed, he says.

Yun says homebuilding is still in a "recovery mode, not booming, but steadily expanding.

Inventory of newly built homes is close to a 50-year low, at 5.0 months in December, he says. The low level should spark more homebuilding.

"My outlook is pretty strong for builder construction," said Celia Chen, an economist for Moody's Analytics. "The main reason is there's very little inventory of new homes available for sale. Inventory stood at 171,000 units at the end of last year, which is still near a record low.

In an environment of low supply of new homes, as demand for housing increases, builders "really have to step up construction" to satisfy demand," she adds.

"The macro backdrop for builders is about as positive as we've seen in a while," said Sterne Agee analyst Jay McCanless.

Stephen Melman, director of economic services for the National Association of Home Builders, calls the environment for homebuilding "a recovery in slow motion. But things are looking good.

The NAHB sees housing starts up 24.4% in 2014 and single-family starts up 32.1% to a level of about 820,000, from only 621,000 in 2013.

There are head winds, such as the higher cost for land, says Melman. Meanwhile, prices for building materials such as gypsum and lumber are "expensive.

Another head wind would be if interest rates were to "shoot up" instead of rising slowly, says Yun.

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