Though construction activity saw a frigid start in 2015, we expect it to pick up when the spring selling season is in full swing. The season warms up in March and sees maximum business til the back-to-school season in September. We expect overall housing demand to improve as the year progresses, with an upbeat economy and continued job growth.
Though headwinds remain in the form of an increasingly competitive environment and cost inflation amid moderating home price increases, there are plenty of reasons to be optimistic about the broader housing sector over both the short and long terms.
Below, we discuss some of these key reasons and what investors in the housing sector can look forward to in the coming months and years.
Firming Home Prices, Stable Mortgage Rates to Spur Demand?
Most homebuilding companies have been witnessing average price increases across all operating regions. This has mostly been backed by a shift to higher-priced homes or market-driven price increases.
However, as demand stabilized, housing price gains slowed in 2014. This trend is expected to continue in 2015.
Meanwhile, mortgage rates in 2015 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 4.34% in March 2014 to 3.77% in March this year. Even if mortgage rates rise in the latter half of the year – as is widely anticipated – home prices should still remain reasonable.
Low mortgage rates and moderating home price gains give homebuyers the much-needed confidence paving way for higher home demand.
Improving Economic Growth
Improving economic growth coupled with a better employment picture generally boosts household formations and provides a basis for stronger housing demand
Even though the U.S. economy slowed down in the fourth quarter of 2014, after impressive growth in the second and third quarters, it is still growing faster than the rest of the developed world. Also, the recent slowdown can mostly be attributed to the strong dollar and harsh weather conditions. The economy is expected to pick up later this year.
Moreover, though consumer confidence declined slightly in February, it improved in March and is expected to get a further lift on the momentum in the U.S. economy. Improving consumer confidence, an upbeat economy and improving employment trends should lead to better home sales as the year progresses.
Lower gas prices have also increased discretionary income and with that the desire to buy homes. To add to the positives, plans from the White House to cut premiums on mortgage insurance should encourage home buying among the first-time homebuyers.
In addition, apartment rental rates have continued to move up making home buying more attractive than renting. Moreover, analysts are predicting that with rising home prices, it will be difficult for the millennials to pay the down payment which has been rising too. So instead of buying, they will rent, in turn increasing rents.
Land as Native Strength
Homebuilders like Lennar Corporation (LEN - Analyst Report), D.R. Horton, Inc (DHI- Analyst Report) and Toll Brothers, Inc. (TOL - Analyst Report) with a well-stocked supply of land, plots and homes are well positioned to meet higher housing demand in the spring selling season and thereafter.
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 D.C. – where land is scarce and approvals are not easy to come by.
Lennar’s diligent land purchases and growing community count position it well to generate high 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 - Analyst Report) spent $1.8 billion on land and related development in 2014, up roughly 40% year over year. It further aims to increase investments to $2.4 billion in 2015, up roughly 30% from the 2014 levels. Texas-based homebuilder D.R. Horton invested $2.6 billion in land, lots and development in fiscal 2013 and $2.3 billion in fiscal 2014, positioning it well to meet future demand.
Smaller homebuilders Ryland Group, Inc. (RYL - Snapshot Report), Beazer Homes USA Inc. (BZH - Snapshot Report) and Meritage Home Corporation (MTH - Snapshot Report) spent $913 million, more than $500 million and $705 million, respectively on land investments in 2014.
Conclusion
Homebuilders in general seem quite optimistic about improving demand in the upcoming spring selling season.
Investors could definitely take advantage of the opportunities in the near term to cash in on any sudden surge in the homebuilding sector.
by Zacks Equity Research
Source: http://www.zacks.com/commentary/42487/3-reasons-why-you-should-buy-homebuilder-stocks
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