Homebuilders experienced a 22% order growth in the first quarter and are riding a tailwind heading into the second, causing Barclays Capital housing analysts to see the first signs of price increases coming back to the market.
“Not everywhere, but in enough places to matter,” they say.
In many of the markets that Barclays reviewed, it witnessed a return of broad-based price increases — a possibility, it says, very few industry watchers considered.
Stephen Kim, managing director of Barclays’ homebuilding division, tells HousingWire that Phoenix, Denver, Orange County, Calif., Westchester County, N.Y., and even parts of the hard-hit Riverside-San Bernardino, Calif., region is witnessing price comebacks.
However, commentary so far from builders reveals mixed opinions about how broad-based the increases are.
The most upbeat commentary regarding pricing has come from Lennar (LEN), Meritage Homes (MTH) and Ryland Group (RYL). Those three builders have posted the strongest order trends. All three indicate to Barclays that the opportunity for price increases is stretching from geographies and buyer types.
D.R. Horton (DHI), PulteGroup (PHM) and M/I Homes (MHO) posted order gains of 10% to 20%, but were relatively more cautious about their ability to secure price increases on a broad basis, analysts say.
“Yet, looking past the rhetoric, we believe that the underlying market condition being described on all of the calls is fairly consistent: Price increases are still not the norm, but in the top 25% to 35% of the builders’ communities, they are back and forcing analysts to rethink what housing’s recovery can look like in 2012,” analysts contend.
The builders are benefiting in part from low inventories of existing homes, which are being snapped up by investors and foreign buyers. That has prompted a number of consumers to start considering new homes.
Click on the image below to see a three-year breakout of homebuilder order growth:
Homebuilder orders per community are running at 2.3 per month, the highest first-quarter rate in four years. There’s still a long path ahead, however. Analysts at Barclays expect absorption rates to return to their long-term average of 3.5 sales per community per month over the next few years.
“So far, the order activity in the first quarter has lived up to our high expectations, making us comfortable with our outlook for 22% order growth in the second quarter,” they say.
With the noticeable exception of KB Home (KBH), sales growth at builders that have reported was quite strong, led by Meritage with a 36% increase. The order decline at KB Home is due to company-specific disruptions with its mortgage partner. Excluding it, the group’s orders are up an average of 26% annually.
Commentary on most of the conference calls indicates that trends strengthened in the quarter and that this pace continued in April.
Additionally, the recent strength in homebuilder orders might suggest that housing starts are set to elevate over the next few months. There is a close relationship between sales orders reported by builders and single-family housing starts reported in the following quarter.
Based on the orders announced this quarter, Barclays estimates that single-family housing starts over the next few months will average 493,000 after the 462,000 reported last month and 431,000 for the full year 2011.