Politics & MoneyReal Estate

Homebuilders left shaken, but opportunities are on the horizon

While the market witnessed softer-than-expected data on all ends of the spectrum Thursday, the housing market continues to deal with conflicting forces.

Weekly jobless claims jumped the most since November this past week, while the Consumer Price Index posted its biggest decline since December 2008 and housing starts came in below market expectations. 

However, the silver lining for housing was applications to build new homes hit an impressive 1.02 million permits

Nonetheless, homebuilders trading on Wall Street felt the aftershock of weak data as performance among the big players such as Hovnanian Enterprises, PulteGroup, Lennar and Toll Brothers posted an average 2% drop.

“Although we have seen a big jump in volumes for homebuilders, they are also taking a much larger share of the construction activity than in the past,” said Martha Ucko of CreditSights.

“Trends is indeed a friend, but enthusiasm has to be tempered by the fact that the current ‘recovery’ volumes only exceed the trough levels of one of the U.S. downturns seen over more than 45 years – and that was in the early 1980’s,” Ucko added.

New home starts on private residences dropped significantly from the revised March estimate of 1.02 million units to a seasonally adjusted 853,000 units in April, according to data from the U.S. Census Bureau and the U.S. Department of Housing and Urban Development

Jobless claims spiked higher this week, up 32,000 to a 360,000 level, the highest since March.

Meanwhile, the consumer price index fell 0.4% after declining 0.2% in March, coming in below market expectations.

The Bloomberg Consumer Comfort Index paused this week after its best month in more than five years. However, economic expectations were not as strong.

Nonetheless, the improvement that has happened in the housing market has come despite the major obstacles to accessing the mortgage market, which may keep a larger pool of Americans away from homeownership for a while.

“Historically, new construction has correlated very close with the job trends. When we are gaining jobs in this country, construction activity has been much better than we are losing jobs,” Ucko explained. 

However, while there has been some uptick in remodeling activity and rental activity, the construction jobs data, which was unchanged in April, remains 1.7 million below December 2007 levels. 

There are two major issues interfering with builders place in the market — namely sales driven by distressed asset transactions and the trend of some potential buyers failing to ‘qualify for’ or afford a mortgage.

For homebuilders who have shifted toward more active markets — such as luxury markets — there has been a significant uptick in volumes with deliveries up 27% on average for homebuilders over the past year, according to data from CreditSights

“Given the advantage that the homebuilders have in adjusting to the demand environment that we have stressed for the past year, coupled with the very low volumes they were coming from, we believes that the improvements that we have seen with the homebuilders, outperformance of the broader market over the past year has been warranted and that there are still good opportunities to get involved in the space as volumes continue to improve and fundamentals benefit from the improvement,” Ucko concluded.


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