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Why higher home prices mean higher profit for KB Home and Lennar

Chanderlekha Nayar

The economy and the fixed income markets: Must-know latest updates (Part 5 of 11)

(Continued from Part 4)

Better prices for homebuilders

Mostly, the periods of rising home values encourage new construction, while periods of declining home prices can dampen housing starts. Higher prices can actually help the housing market as more supply flows into the market and buyers get more options to choose from.

Recent releases by the Federal Housing Finance Agency (or FHFA) House Price Index (or HPI) suggested a 0.5% monthly appreciation in the U.S home prices on a seasonally-adjusted basis, 23rd increase in past 24 months barring November 2013 when the prices dropped by 0.1%. The year-on-year growth rate for home prices posted at 7.4%, following 7.5 % growth in December.

Around 22nd to 25th of every month, the Federal Housing Finance Agency (or FHFA) releases the home sales price information gathered from mortgages either sold to or guaranteed by Fannie Mae and Freddie Mac.

Eight of nine census regions showed gains in the latest month, while one declined. The largest regional increase was in the Middle Atlantic Census Division (covering New York, New Jersey, and Pennsylvania) at 1.3%. The home prices in the West South Central, with states such as Oklahoma, Arkansas, Texas, and Louisiana declined by 0.3%.

The consecutive monthly rise in the home prices have helped support consumer confidence in the real estate market, which is expected to be returning after an prolonged depression since the country experienced one of its worst financial crisis. The rebound in the housing activity is expected to positively impact the profitability of the homebuilders and realtors like D.R. Horton (DHI), K.B. Home (KBH), Lennar Corporation (LEN), and Toll Brothers (TOL).

The major real estate ETFs include iShares U.S. Real Estate ETF (IYR) with top holdings in Simon Property Group, Inc. (SPG). The ETF tracks the performance of the Dow Jones U.S. Real Estate Index.

Continue to Part 6

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