Homebuilders were greeted with the report that new home sales
have rebounded in August after having declined in July. The news
was all the more encouraging as it sparked hopes that the rising
mortgage rates may have slowed but not completely stopped the
Shares of many homebuilding stocks like
Ryland Group, Inc
Hovnanian Enterprises Inc.
D.R. Horton Inc.
) rose after market hours on hopes that the housing market will
continue to recover.
The U.S. Census Bureau reported on Wednesday, Sep 25, that
sales of new single-family houses increased 7.2% from July to a
seasonally adjusted annual rate of 421,000 in August; a
significant improvement from the 13.4% decline seen in July. The
August figure is above the revised July rate of 390,000.
Moreover, new home sales were up 12.6% from the year-ago
The report also stated that the median sales price of new
houses sold in August was $254,600. Moreover, housing inventory
stood at 175,000 homes at the end of August, representing a
supply of 5.0 months at the current sales rate.
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 4.50% as of Sep 19. As a result we found the
share prices of most housing stocks hurtling down after having
peaked in May.
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.
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 believes 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
Earlier this month, the Federal Reserve unexpectedly announced
that it was not starting to taper its current $85-billion-a-month
bond buying program. Fed Chairman Ben Bernanke said that they
wanted to see more evidence of economic growth before reducing
the bond buying. Interest rates have fallen slightly after Fed's
'no taper' decision.
This week, Lennar and KB Home reported better-than-expected
third quarter earnings despite the rising interest rates. Both
the homebuilders stated that the sudden spike in
interest/mortgage rates had their slowed order pace and traffic.
However, they believed that the moderating sales pace was a
temporary effect and demand should go up once consumers adjust to
both higher rates and pricing.
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
RYLAND GRP INC (RYL): Free Stock Analysis
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