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Real Estate

Homebuilders alarmed as first-time homebuyers stay sidelined

Tight lending requirements block younger consumers

Lennar (LEN) and KB Home (KBH) will release earnings Tuesday, providing the market a glimpse at how builders are faring in a market riddled with reluctant first-time homebuyers.

In anticipation of the firm's earnings, Sterne Agee analyst Jay McCanless maintained neutral ratings for both builders, recognizing that without new first-time homebuyers they will be somewhat strained.

According to McCanless, both KB Home and Lennar's buyer mixes are skewed with first-time buyers making up 70% and 60% of their business, respectively. Because of this, the analyst says reluctance among first-time buyers is largely responsible for the second-quarter orders at both companies missing their estimates.

McCanless forecasts 30% year-over-year order growth for Lennar in the third quarter of 2013 and 10% year-over-year growth for KB Home, estimates he believes are achievable.

However, the analyst added that first-time buyers comprised only 28% of August existing home sales versus 29% last month and versus the historical average of 40% to 45% — a sign entry-level buyer access to mortgage financing may not be improving.

Walt Molony, economic issues media manager at the National Association of Realtors, believes first-time buyers are underperforming in the current market because of limited inventory and strict loan restrictions.

According to data from NAR, first-time buyers accounted for 28% of purchases in August, down from 29% in July and 31% in August 2012.

But buyers aren’t the only ones facing tight lending standards. "Historically most builders are small businesses and they are still having difficulty getting construction loans," said Molony.

He added that most homebuilders are not targeting first-time homebuyers, but are focusing their efforts on repeat buyers. "We are expecting that more existing owners will be listing their property for sale," said Molony, who noted that there is currently insufficient inventory and a need for new construction to fill the demand of repeat buyers.

In a Barclays market analysis released Monday, KB Home was identified as the least attractive homebuilder in terms of exposure to attractive MSAs — areas where homebuilders might expect sales to increase over the next year.

The five MSAs with the highest annual revenue generation potential are: Phoenix, Dallas, San Francisco, Seattle and Portland.

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