Homebuilders' perfectly terrible storm

Rising material costs, weak existing-home prices and a glut of distressed properties on the market are crushing builder confidence.

By TheStreet Staff Jun 16, 2011 10:58AM

Image: Home under construction (© Corbis)By Miriam Reimer, TheStreet


Homebuilder sentiment fell to an eight-month low in June as a perfect storm of weak existing-home prices, rising material costs, distressed property sales and sluggish consumer confidence brewed in the housing market.


"Builders are being squeezed by the continuing weakness in existing-home prices -- against which they must compete -- as well as rising material costs," said Bob Nielsen, a homebuilder from Reno, Nev., and the chairman of the National Association of Home Builders.


"In addition to the ongoing impacts of distressed property sales on home prices, appraisal values and consumer confidence, rising costs for materials such as roofing, copper, wallboard, vinyl siding and other components have made it extremely difficult to construct a new home and sell it at a price that covers the costs."


Nielsen is far from alone in his view.

Data released by NAHB Wednesday showed that its index of builder sentiment plunged 3 points in June as confidence waned and the economic recovery stalled.


The NAHB Housing Market Index, which measures builder perceptions of current single-family home sales and sales expectations for the next six months, came in at 13 in June, much lower than the reading of 16 economists had expected, according to consensus estimates listed on Briefing.com.


Any reading below 50 indicates poor sentiment. The index has not been above 50 since April 2006. It had held steady at a reading of 16 for six of the past seven months.


"Builder confidence has waned even further as economic growth has stalled, foreclosures have continued to hit the market and the cost of building a home has risen," said NAHB chief economist David Crowe.


"Meanwhile, potential new-home buyers are being constrained by difficulty selling their existing homes, stringent lending requirements and general uncertainty about the economy. Economic growth must pick up in order for housing to gain the momentum it needs to get back on track."


The housing and homebuilding sector is well off its year-ago spring peak, ahead of expiring tax credits, and is only slightly higher than at the beginning of 2010.


Whereas other sectors have begun an economic rebound in earnest, housing continues to lag as a bloated supply of homes for sale -- both newly built and previously owned -- coupled with depressed pricing from foreclosures pressure the market.


Even so, mortgage applications spiked 13% last week, the biggest gain in three months, as homeowners refinanced to take advantage of low mortgage rates rather than purchase or a new or previously owned home, the Mortgage Bankers Association said earlier Wednesday morning.


The average rate on a 30-year fixed mortgage edged lower to 4.51% in the week ended June 10, down from 4.54% in the prior week, remaining well below the psychological benchmark of 5%.


"Mortgage rates have declined for eight of the past nine weeks. Coming off of the Memorial Day holiday, refinance application volume increased significantly, as borrowers jumped to lock in the lowest mortgage rates since last November," said Michael Fratantoni, MBA's vice president of research and economics.

Another positive sign came Thursday morning, when the Census Bureau said housing starts rose 3.5% in May, to 560,000, up from 541,000 in April, surpassing economists' expectations. May building permits rose unexpectedly, gaining 8.7% to 612,000, up from 563,000 in April and well above the 548,000 permits economists had predicted.


The SPDR S&P Homebuilders (XHB), an exchange-traded fund that tracks the homebuilder sector, was up 1.5% Thursday but remains around 60% off its peak of $46.08 in early 2006. The iShares Dow Jones U.S. Home Construction (ITB) ETF remains more than 70% off its peak of $50.10 in spring 2006.


The housing data gave a lift to individual homebuilder stocks, which were recouping Wednesday's losses in a broad market rally.


Lennar (LEN), largely considered a leader among the homebuilders, was rallying 3.1%. PulteGroup (PHM) was gaining 3.7%, and D.R. Horton (DHI) was adding 3.7%.


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