Real Estate

Homebuilders build momentum as existing home sales fall

Disappointment seemed to flood the housing industry upon Monday's existing-home sales report for June, which revealed total existing-home sales fell from May. Many analysts saw this as a smaller piece of a bigger picture that rising interest rates are deterring potential homebuyers from entering into the market. 

However, homebuilders should have slept easy last night, as the drop in existing-home sales actually supports a positive housing outlook for them.

The primary competitor to public homebuilders is existing-homes for sale, Sterne Agee analyst Jay McCanless told HousingWire. 

The lack of existing home supply is forcing Realtors to bring buyers who may not have been interested in a new home into new home neighborhoods, said McCanless. "Assuming that the inventory situation either stays where it is or gets tighter from here, I think that’s a positive for homebuilders," he added. 

With inventory low and demand high, the median days to sell a home dropped 47.1% year-over-year in June, falling from 70 days to 37 days. 

According to the analyst, it’s basic supply and demand. Builders can create the supply and the demand for housing is still abundant, despite higher rates. If you have such a high demand level, it implies that group of buyers have access to financing and creates a very positive market, McCanless noted. 

According to McCanless, the backdrop remains positive for four homebuilders that he hand selected as his top picks.Meritage Homes Corp. (MTH), D.R. Horton, Inc. (DHI), Ryland Group (RYG) and PulteGroup, Inc. (PHM) have the potential to increase their pricing power in 2013 as competitive supply comes off the market. 

In a conference call on Tuesday, Fitch Ratings Managing Director and lead homebuilding analyst Robert Curran addressed the existing-home sales report as well as the current state of the housing recovery. He said it’s necessary that employment continues growing at a reasonable pace for housing to do well. Last month, 195,000 jobs were created, pushing the unemployment rate down to 7.6%. 

Fitch’s economic forecast is hesitant, considering the drag tax increases have had on the economy since the start of the year. However, the growth momentum in the private sector is well supported by the recovery in the housing market. 

Fitch’s housing forecast for 2013 predicts inventory remaining near low levels, while affordability remains high. 

"The housing recovery shall be maintained this year," said Curran. Fitch anticipates single-family starts to rise 18% in 2013, while existing-home sales will only increase 7.5%. 

Broken down, it's anticipated that total home sales will equal one million this year. Existing-home sales are expected to dominate new home sales significantly.

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