Shutdown analysis: REITs and homebuilders (Part 4 of 4)
The shutdown will affect homebuilders in different ways. The interest rate effect will help drive home affordability, while the macroeconomic effect will depress consumer sentiment. Finally, the credit effect will affect availability mortgages, which will drive their earnings.
The interest rate effect
The interest rate effect means interest rates will decrease at the margin as the Fed stays on hold. This will mean lower mortgage rates, which makes their inventory more affordable. We saw on the recent earnings calls from Lennar (LEN) and KB Home (KBH) that affordability is depressing activity at the lower price points (think first-time homebuyers). Not only have prices increased over the past 18 months, but rates have also increased, making monthly payments higher. The interest rate effect will matter more to homebuilders like PulteGroup (PHM) than it will to luxury homebuilders like Toll Brothers (TOL). One name to watch is NVR (NVR), which is based in the Washington, DC, suburb of Reston, Virginia, and has a lot of exposure to the Beltway. Any sort of extended shutdown will hit them particularly hard.
The macroeconomic effect
Virtually all economists agree that any sort of extended shutdown will depress the economy, which will mean fewer people with jobs—and people who have jobs are unlikely to get raises. A shutdown is also likely to depress consumer confidence as the uncertainty takes its toll. KB Home has said that consumer confidence is a bigger driver of its business than interest rates. Any sort of drop in the consumer sentiment numbers would portend weaker sales.
The credit effect
This could really hurt. As we discussed earlier, mortgage originators won’t be able to verify income and tax payments until the government is operating again. This means no new origination for the time being. Cash buyers are focused on distressed properties—not new construction. If you’re a builder, it doesn’t matter how well you’re priced or how great your location is if your buyer can’t get a mortgage. Any extended shutdown will be felt here—and pretty much equally by all the builders.
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