The latest announcements from big homebuilders like D.R. Horton Inc. DHI and Meritage Homes MTH hint at weakening sentiments among homebuyers amid the coronavirus-led economic shutdownthat wreaked havoc on the job market and cash availability.
Last week, D.R. Horton indicated that demand for homes in the latter part of March was substantially hurt, with continuation of the same in April. Cancellation rate in March was 24% compared with 18% a year ago.
Nonetheless, gross sales orders in the month grew 14% to 8,511 homes from 7,495 homes in March 2019. Net sales orders in the month increased 6% to 6,491 homes from 6,127 homes in March 2019 and the value of net sales orders increased 5% to $1.9 billion from $1.8 billion.
Meritage also pointed to such lackluster trend. Business conditions weakened in the latter half of March. Order cancellation rate in the month increased to 16% from 12% in the comparable year-ago period. Notably, net orders declined 8% year over year in March on account of heightened coronavirus threats.
No wonder, such order patterns would deal a blow to builders’ sentiments too. Home-builder confidence in April plunged to the lowest level since 2012. April’s decline (a havoc 42 points) marks the largest monthly change in the index’s 30-year history.
What’s in Store?
Investors should note that the housing industry has long been grappling with land and labor crisis. Low inventories and relatively higher prices were deterring buyers even before the virus outbreak.
However, after the economy reopens and virus outlook improves materially, we expect buying to regain momentum, given the rock-bottom rates prevailing in the economy. Inventory levels should improve by that time as builders are continuing operations despite the shutdown, although demand has slackened. Home prices, which rose 26.1% over the past five years till this January, should see some moderation, adding to further affordability.
Investors should note that the Department of Homeland Security has designated single- and multi-family housing construction as an essential business . Hence, building activity has continued in many states amid stay-at-home orders. Chief Executive Officer of NAHB indicated that "construction sites are able to ensure workers’ safety and adhere to social distancing guidelines,” as quoted on MarketWatch.
The construction sites could remain open till companies in the building industry can avail the Paycheck Protection Program seamlessly. However, we would like to note that banks have been following stringent policies in disbursing loans (read: Fed Goes the Extra Mile: 6 ETF — Areas to Win).
Having said all, it all depends on how long the virus-led rout continues. If things get back to normal soon, housing ETFs like SPDR S&P Homebuilders (NYSE:XHB) ETFXHB and iShares U.S. Home Construction ETF ITB — that were thrashed in the peak of coronavirus carnage — may make a sturdy comeback.
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D.R. Horton, Inc. (DHI): Free Stock Analysis Report
Meritage Homes Corporation (MTH): Free Stock Analysis Report
SPDR S&P Homebuilders ETF (XHB): ETF Research Reports
iShares U.S. Home Construction ETF (ITB): ETF Research Reports
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