Acting as a deterrent to the surging hopes of a housing
recovery, new home sales in July were reported to have dropped a
sharp 13.4%. While the news affected the broader markets for a
short span on Friday, the housing sector had to suffer a finish
in the red owing to increasing concerns that the rising mortgage
rates could slow down the housing recovery.
The SPDR S&P Homebuilders (XHB) lost 1.4% on Friday and
shares of homebuilders such as
Toll Brothers Inc.
Hovnanian Enterprises Inc.
D.R. Horton Inc.
) sank between 2% and 4% on the announcement.
The U.S. Census Bureau reported on Friday, Aug 23, that sales
of new single-family houses declined 13.4% to a seasonally
adjusted annual rate of 394,000 in July. The July figure is much
below June's rate of 455,000, which was revised down from a
previously reported 497,000. The July figure was also much below
the median estimate of economists surveyed by Bloomberg. However,
new home sales are still up 6.8% from the year-ago period.
The report also stated that the median sales price of new
houses sold in July was $257,200. Moreover, housing inventory
stood at 171,000 homes at the end of July, representing a supply
of 5.2 months at the current sales rate.
In sharp contrast to weak new home sales data, sales of
existing homes rose in July according to the data published by
National Association of Realtors last week. Moreover, data
published by the National Association of Home Builders (NAHB) in
mid-August showed that housing starts across the U.S. rose 5.9%
Since mid 2012, homebuilders have largely benefited from
historically low interest rates, eventually leading to the sharp
increase in home buying activity. With the recent improvement in
economic conditions and the housing market in general,
mortgage/interest rates have been edging upward to more
normalized levels since May 2013. According to the Freddie Mac
mortgage survey, the 30-year fixed mortgage rate has risen from
3.59% on May 23 to 4.58% as of Aug 23. In fact, mortgage interest
rates are at the highest level in two years. As a result we found
the share prices of most housing stocks hurtling down after
having peaked in May. The better-than-expected earnings at most
homebuilders in the last quarter also failed to prevent the share
This has raised concerns among some analysts. High interest
rates dilute the demand for new homes, as mortgage loans become
expensive. Subsequently, this lowers a buyer's purchasing power.
Moreover, if the Federal Reserve scales back its current $85
billion bond buyback program and instead adopts a tighter
monetary policy, as planned, interest rates may further shoot up.
This in turn would lower revenues and profits of
However, another group of analysts believe that interest rates
are still below historical levels despite the recent hike and
housing is still very much affordable. Home prices have also
started rising with market demand gaining momentum but supply
remaining limited (both of existing and new homes). In fact, this
group of analysts believe that rising home prices and thinning
home inventories have created a sense of urgency among homebuyers
to buy a house before prices or mortgage rates shoot up
D R HORTON INC (DHI): Free Stock Analysis
HOVNANIAN ENTRP (HOV): Free Stock Analysis
KB HOME (KBH): Free Stock Analysis Report
LENNAR CORP -A (LEN): Free Stock Analysis
PULTE GROUP ONC (PHM): Free Stock Analysis
TOLL BROTHERS (TOL): Free Stock Analysis
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