Increased foreclosure activity affects homebuilders
Foreclosures depress home prices and creates appraisal difficulties
Foreclosures also remind potential buyers of the risks of investing in real estate, which isn’t a good situation for homebuilders. KB Home actually mentioned on its last conference call that it views consumer confidence as a bigger driver of new home purchase activity than interest rates.
This effect has been apparent in the quarterly earnings reports of homebuilders so far. NVR, which is East Coast–based, reported an increase in sales, but nowhere near West Coast–focused builders, like KB Home (KBH), Lennar (LEN), Meritage (MTH) or Ryland (RYL).
Homebuyers are more likely to be comfortable taking risk when prices are appreciating at double-digit rates or higher. This phenomenon explains why the West Coast has fared so well.