U.S. Homebuilders Lose Optimism as Sales Fall
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Homebuilders are becoming increasingly pessimistic, as stagnant wages and falling demand from investors is pinching the market.
The National Association of Home Builders saw its builder confidence index fall one point to 57, slightly below expectations, as recent improvements in the housing market cool off. While any number above 50 indicates that the market is still good, the decline also suggests that an acceleration of growth going into 2015 is less likely than previously expected.
Homebuilders are becoming increasingly pessimistic, as stagnant wages and falling demand from investors is pinching the market.
The National Association of Home Builders saw its builder confidence index fall one point to 57, slightly below expectations, as recent improvements in the housing market cool off. While any number above 50 indicates that the market is still good, the decline also suggests that an acceleration of growth going into 2015 is less likely than previously expected.
Despite the fall, NAHB Chief Economist David Crowe is optimistic that the market will “continue to move forward in 2015” as “rising consumer confidence and a growing labor market” bolster the sector.
Declining Construction Profits
Earlier this month, American homebuilder KB Homes saw its stock sink over 16% in a day after warning that house construction was becoming less profitable because of falling demand for homes
“Unfortunately we experienced the softening in demand in some of our served markets as the quarter progressed with increased pricing pressure while at the same time we continue to face cost pressure among other things,” said CEO Jeff Mezger, adding that fewer sales and higher costs were squeezing the company. “We were impacted as a result of delivering fewer homes than we had previously expected, consequently we lost some operating leverage on our indirect construction costs.”
The stock has since fallen a further 13%, while other U.S. homebuilders PulteGroup, D.R. Horton, Hovnanian, and Toll Brothers also saw declines.
Fellow homebuilder and home financing corporation Lennar also posted disappointing results and lower margins in January, causing the stock to slump over 10% in five days. While the Miami-based company previously rode the wave of real estate speculation before the crash in 2008, the stock price has failed to recover to all-time highs, remaining over 30% below levels reached in 2006.
Homebuilder Downgrade
The disappointing results have led several economic analysts to downgrade their expectations for homebuilders. Investment banks Credit Suisse and JMP Securities have downgraded expectations for American homebuilders.
The falling performance of the housing sector has caught many analysts off guard, since many assumed improving labor conditions and cheap credit would accelerate home buying in late 2014 and throughout 2015. At the same time, contrarians have argued that flat to declining wages, combined with real higher costs for services even as energy and food prices fall, have been pinching the American middle class and causing home buying, even with low mortgage rates, to remain out of reach.
Home price to income ratios remain far above the FHA’s baseline standard of 3x annual income throughout the country. In New York City, Houston, Phoenix, San Antonia, Dallas, Jacksonville, Indianapolis, Austin, Columbus, Fort Worth, El Paso, Seattle, Denver, Nashville, Louisville, Portland, Miami, and Oklahoma City, the median home sale price to median household income ratio exceeds 5, or 66% higher than the FHA benchmark.
