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August 05, 2009
Despite Positive Indicators, Housing Recovery Not Close
Homebuilders' stocks have been performing well recently, in part because of a run of positive reports such as home sales and consumer confidence, up almost 40% since mid-March. Rising U.S. Treasury yields have been driving interest rates up, while foreclosures continue to increase the national inventory of unsold homes. According to data released by the US Census Bureau and Housing and Urban Development, new sales of single family dwellings were reported at an adjusted annual rate of 353,000 in April, slightly higher than the 352,000 March revised estimate, but 25% lower than the 534,000 estimated in April of last year. Meanwhile new home sales are down from February's 363,000. The national median sales price for new homes was $210k, almost 15% lower than last year at the same time.
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One factor in the rise in sales the past few months is the temporary halt in foreclosure filings adhered to by many banks from November to February. Since then, foreclosures have picked back up, and sales have risen as a result.
The housing market index, released by the National Association of Homebuilders, rose 2 points to 16 in May after gaining 5 points in April.
Though economists would like to take recent data as a sign that the housing market has reached the bottom, prices have a ways to go to reach analysts' peak-to-bottom estimate of 44%. Experts predict the median home price will drop another five or six percent. Areas with lower property values have already taken huge hits, as those are the areas where most distressed property sales have occurred. Nicer neighborhoods will feel the crunch in the next year or so, as foreclosures on higher value properties mount.
In Phoenix, Arizona, one of the hardest hit areas in terms of falling prices relative to their peak, sales-office traffic climbed 56% from Feb. to Apr. after falling for 11 straight months. Traffic is a key indicator of the direction home sales are heading.
Phoenix is being closely monitored as sign of what the nationwide market could be like 12 to 18 months from now. The homebuilders' properties in the Phoenix area make up a significant portion of their holdings.
Most of the sales in the Phoenix area are purchases by bargain hunters taking advantage of foreclosure-driven low prices. The majority of new homes being sold are purchases by first-time buyers, utilizing the $8,000 federal tax credit, which is good for those who close on their homes before Nov. 30. The new wave of foreclosures expected in the next few months will force homebuilders to discount new homes to compete.
A national housing market research company in Houston, Metrostudy, predicts housing starts this year to total 490k, lower than the 535k average forecast from economists. Three reasons cited by Metrostudy for the decine in housing starts are: inventory of unsold new homes builders must unload, difficulty in obtaining credit, even for builders current on their loans, and lower prices which are impacting profitability for the builders.
Housing inventory dropped to a 10 month supply from 10.6 in March, well below the peak of 13.1 months.
As for homebuilder stocks, analysts are high on D.R. Horton (dhj.), predicting the company will be the among first homebuilders to return to profitable status in 2010. MDC Holdings (mdc.) is also a favorite stock of analysts, due to its strong balance sheet.
KB Home (kbh.), however, is rated "underperform" due to weak demand, falling prices, and increased competition from low-end homebuilders where the company operates.
While some data indicates a bottom in the market is close, few analysts are predicting a recovery anytime soon. Mortgage rates are artificially low and will be rising in the coming months, hindering any possible recovery. And, though demand may rise, continued foreclosures will dampen its affect and it will take several years to bring inventory down to manageable levels.
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