Tags: homebuilding | economy | trend | home

Homebuilders Rallying, Everyone's Talking About One Key Trend

Tuesday, 23 Jun 2015 12:26 PM

Homebuilding stocks have been on a nice run, with the S&P Homebuilders ETF (XHB) touching a new eight-year high on Tuesday. Shares have pulled back a bit since then.

One quote from homebuilder KB Home last week explains the enthusiasm behind the sector: On the company's quarterly conference call last week, Chief Executive Officer Jeff Mezger said, "The most encouraging statistical trend that bodes very well for future housing demand is the dramatic increase now occurring in household formation," pointing to the return of the first-time buyer.

At KB Home, the percentage of first-time buyers increased to 56 percent of total buyers in the second quarter, up from 50 percent in the quarter before.

The importance of the first-time buyer was underscored in Monday's existing home sales data. First-time buyers accounted for 32 percent of purchases this month, up from 30 percent in April and 27 percent a year ago. Excluding November 2009—when demand spiked from the expiration of the first-time homebuyer tax credit—sales last month were the strongest in more than eight years for this group. According to data from the National Association of Realtors (NAR), first-time buyers should make up 40 percent of the market in "normalized" conditions.

"The return of first-time buyers in May is an encouraging sign and is the result of multiple factors, including strong job gains among young adults, less-expensive mortgage insurance, and lenders offering low downpayment programs," according to Lawrence Yun, NAR chief economist.

The homebuilding merger that kicked off last week, between Standard Pacific and the Ryland Group, also offered a bullish read on prospects for the group because of new demand.

New demand will largely come from the entry-level buyer, according to Ryland CEO Larry Nicholson: "We would expect to increase our combined entry level, because we do expect that market to continue to grow."

The return of first-time buyers may indeed show that we have another leg up. According to Standard Pacific CEO Scott Stowell: "We think we're in the early innings of a recovery."

Deutsche Bank's Nishu Sood put this in context in a conversation with Bloomberg: "The entry-level buyer is widely perceived to be the missing link in this housing recovery. In order for the market to get back to 1.5 million, the market has to build more entry-level homes."

As Home Depot Chief Financial Officer Carol Tome pointed out during the company's May conference call, it looks as if there will be 1 million households formed this year, "which should be awesome." She added, "In fact I'm always fascinated by this statistic. If you look at people between the ages 18 and 34, nearly a third of them are at home with their parents. And if they were all to leave their home nest, like my nephew just did, thank goodness, that's 4 million households that would be created. So I'm just really excited about what the future may be for our business."

The latest Census Bureau report in April marked the fastest back-to-back gains in household formation since the second half of 2005.

Bloomberg Economist Carl Riccadonna reiterates this view. "The housing sector is finally engaging—albeit extremely late, relative to previous economic cycles. This is a result of both impaired credit and a late entry of home buyers," he says. But both of these factors are now shifting: "Banks are increasingly willing to extend mortgage credit, as they are more confident about the economic outlook in general and rising home prices in particular, and demand for housing is increasing as labor market conditions continue to improve."

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Homebuilding stocks have been on a nice run, with the S P Homebuilders ETF touching a new eight-year high on Tuesday.
homebuilding, economy, trend, home
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2015-26-23
Tuesday, 23 Jun 2015 12:26 PM
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