Though the housing market has recovered dramatically from the trough year of 2009, it is still below historical levels, held back by stringent mortgage underwriting and low levels of consumer confidence.
While both show signs of improvement and the outlook for the U.S. market in general and the housing sector in particular remains favorable going into 2015, concerns regarding a possible rise in interest/mortgage rates in 2015 cannot be shaken off now that the Fed has ceased its bond-buying program.
This could start weighing on the sector’s performance and should be taken into consideration before investing in this space.
Below, we discuss some of these reasons and what investors may expect in the coming months and years.
Federal Government Actions
The Federal government’s actions related to economic stimulus, taxation, as well as borrowing limits could affect consumer confidence and spending levels which, in its turn, could hurt the economy and the housing market.
Currently, the probability of a rise in short-term interest rates in 2015 is very high considering the fact that the Fed has ended its six-year long quantitative easing program in October.
Though the Fed had earlier assured that the key interest rate will be kept at the record low level for a ‘considerable time,’ investors have started speculating about the timing of the planned rate hike. It may well be sooner than expected in 2015. Higher interest/mortgage interest rates may have a moderating effect on housing demand and pricing.
Slow Economic Recovery
Sustainable revival in housing and housing demand for the long term will require the overall economy to strengthen. This means further job growth, improving household income, rising consumer confidence and easing of credit availability. The economy though on the mend – with all these factors showing signs of improvement – is far from a complete recovery.
Despite moderate improvement in economic growth, consumers are spending only modestly, as a surge in job growth this year is yet to translate into significantly higher wages. The lending environment is still overly restricted for first-time homebuyers. High down payments and strict underwriting standards are restricting access to the mortgage markets. Until there is a more robust economic recovery, new home sales would continue to lag historical levels.
Supply Constraints
A shortage of approved home sites, labor constraints in some markets and a lack of available capital for smaller builders are reducing the supply of homes, both new and existing. The supply of homes is still not adequate to meet current demand leave alone pent-up demand. If supply fails to improve, home prices could shoot up further, causing many homebuyers to hold back their purchase decisions.
Rising Labor, Land and Material Costs
Rising building materials and labor costs are an increasing margin headwind. As housing starts to accelerate, both labor and construction material costs continue to increase. This could eat into the margins of the homebuilders in the forthcoming quarters. Most homebuilders expect higher land and construction costs next year.
What do the Builders Say?
Despite the headwinds, homebuilder D.R. Horton (NYSE:DHI) considers the current housing market conditions as “relatively stable,” PulteGroup, Inc. (NYSE:PHM) expects a “sustained albeit gradual recovery in housing demand.”
Lennar Corp. (LEN) believes the housing market is recovering at a slow pace, though moving upward in a fairly narrow channel. Hovnanian Enterprises, Inc. (NYSE:HOV) believes that they are in the “early stages of the housing industry recovery.”
Interestingly, according to California-based homebuilder, KB Home (NYSE:KBH), the housing recovery “varies significantly on a local basis” with some areas demonstrating strong demand, while other areas witness softer volumes.
Bottom Line
As you can see there is a long way to go for these homebuilders despite a recovering economic picture. But what about investing in the space right now – will the opportunities outweigh the risks to lure in the short-term investors?
Disclosure: Check out our latest Housing Industry Outlook for more on the current state of affairs in this market from an earnings perspective, and how the trend is looking for this important sector of the economy now.