Tight labor resources and unfavorable weather conditions in the first half of 2015 resulted in production delays in some housing markets in the September quarter. The labor market has tightened with limited availability, thereby arresting the rapid growth in housing production. Moreover, most of the housing data released this month has been rather soft.
Nonetheless, the underlying demand trends in the housing market are still strong. With an improving economy, encouraging job numbers and rising consumer confidence, homebuilding should gain further steam in 2016. For that matter, there are plenty of reasons to be optimistic about the broader housing sector over both the short and long term.
Below, we discuss some of the key reasons driving the sector and what investors can look forward to in the coming months and years.
Firming Home Prices & Stabilizing Mortgage Rates
Most homebuilding companies have been witnessing average price increases across all operating regions. Housing price gains were mainly attributed to market-driven forces and a shift in consumer preference to higher priced homes. However, with stabilizing demand, housing price gains are slowing down.
Meanwhile, mortgage rates this year are still below historical levels, making housing an affordable option. According to the Freddie Mac mortgage survey, the 30-year fixed mortgage rate went down from 4.04% in Oct 2014 to 3.80% in Oct 2015. Even if mortgage/interest rates rise this year if the Fed announces a federal fund rate hike at the December meeting - as is widely anticipated - the rates should remain reasonable.
Low mortgage rates and moderating home price gains give homebuyers much-needed confidence, paving the way for higher demand.
Improving Economic Growth
Improving economic growth supported by a better employment picture generally boosts household formations and provides a basis for stronger housing demand.
Though U.S. job numbers were disappointing in August and September, they picked up again in October, crushing market expectations. With a fall in the unemployment rate, rising wages and decent consumer confidence, the U.S. economy remains strong despite rising global pressures. The improving consumer spending power is in turn propelling the demand for homes.
Apartment rental rates have been moving up, making home buying more financially attractive. Additionally, as the millennial generation leaves their parents' homes, a sharp spike in household formation is translating into higher demand for new homes.
Further, there is a production deficit of both rental and new homes compared with housing demand resulting in pent-up demand against a very limited supply. Land and labor shortage is limiting the production of homes.
With oil prices remaining subdued and the job market looking good, the demand for new homes is on the rise.
Land as Native Strength
Homebuilders like Lennar Corp. ( LEN ), D.R. Horton, Inc ( DHI ) and Toll Brothers, Inc. ( TOL ) with strong land and capital position are able to carefully and methodically add to their land holdings while less well positioned homebuilders are seeing an erosion in their profits.
Toll Brothers has secured some of the most sought-after urban locations in the country - like New York City Market, Northern New Jersey, Philadelphia and Washington DC - where land is scarce and approvals not easy to come by.
Lennar's diligent land purchases and growing community count position it well to generate healthy returns in the future. The Florida-based homebuilder expects to continue to invest in carefully underwritten strategic land acquisitions in well-positioned markets.
Other homebuilders too have realized the importance of land investments to support future growth. PulteGroup, Inc. ( PHM ) and smaller homebuilders like KB Home ( KBH ), Beazer Homes USA Inc. ( BZH ) and Meritage Home Corp. ( MTH ) are gearing up their investments in land to strengthen their position in the improving housing market.
Though labor shortages are a rising concern, homebuilders in general seem quite optimistic about demand trends in 2016.
Investors can definitely take advantage of near-term opportunities and cash in on any sudden surge in the homebuilding sector.
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