The key to homebuilder profit in 2015

Hint: It’s not through first-time homebuyers

As the market and the government push to open the credit box for first-time homebuyers, there's less incentive for homebuilders to cater to new home shoppers, according to analysts Jay McCanless and Annie Worthman of Sterne Agee.

“We believe catering to buyers who have limited income and limited capacity to pay for upgrades (i.e. first-time and subprime buyers) will likely lead to lower gross profits for the average builder,” the analysts said.

“Some builders may compensate via volume, but in a market where home sales and ownership demand have not matched consensus expectations for several years in a row, we prefer builders who concentrate on older, move-up buyers bringing equity from their previous home to the closing table,” they continued.

Mortgage credit availability has been a huge concern over the last year, with the government recently announcing 3% down products.  

Both Fannie Mae and Freddie Mac announced their individual 97% loan-to-value products at the beginning of December, falling in line with the Federal Housing Finance Agency’s push to increase mortgage credit availability.

These new products could boost profit, but the report explained that given the newness of the programs, there is not enough data to formally make a call yet.

“We wrote extensively about the lack of mortgage availability for first-time/subprime borrowers in 2014, and our top picks generate 30% or less of closings from this group. We anticipate the same scenario will exist in 2015 because we do not believe banks are being compensated for the tail risk on mortgages,” they said.

And it won’t be long before fourth-quarter earnings reports start coming out, with homebuilder earnings releases starting on Jan. 13.

The earnings will shed more light on homebuilders’ plans for the year and any early reads on the new mortgage programs.

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