Strength of Housing in Question as Home Builders Set to Report
Several of the nation's largest public home builders will report earnings next week, and analysts are looking for guidance as to whether the housing recovery may be stalling.
Sentiment among the builders fell for the third straight month in April after rising steadily through much of 2012.
"The home builders themselves are themselves worried about their ability to provide the housing in a lot of instances," says Jerry Howard, CEO of the National Association of Home Builders.
Lack of land, labor and credit are all standing in the way of increasing home buyer demand, and leaving many of the small and mid-sized builders frustrated as their costs soar. They simply don't have the access to cash that the bigger players do.
"I think for the short term the people who have the cash will have the advantage. Over the longer haul, I think it will even out. I think the recovery is uneven," says Howard.
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The first builder to report Monday is Virginia-based NVR, with Ryland, Pulte and D.R. Horton continuing through the week. Analysts say Texas-based D.R. Horton, whose stock has recently outperformed its peers, is the one to watch, a bell weather for the group.
"They are the largest builder in terms of the number of closings, and they are in the most markets, so they will probably be able to tell us not only about orders, but also about other things that are important to folks now, like what are material prices doing, how are you negotiating with suppliers," notes Megan McGrath, an analyst at MKM Partners.
Most of the big builders have seen dramatic growth in new orders, as first time home buyers slowly come back to the market. These buyers are facing stiff competition from all-cash investors in the existing home market, and are therefore looking to new builds. D.R. Horton is an entry-level builder, but has been able to shift product to move-up buyers when the demand is there. Move-up buyers have been moving out of the market of late, despite the overall housing recovery and rising values.
"I think the recovery we're seeing right now is first-time buyer and the very high end of the market. The move-up buyer has not really shown up as of yet, and if you want to see a very strong recovery in housing we need to see the move-up buyer playing a more prominent role than they are today," says Richard Smith, Chairman and CEO of Realogy Holdings Corp.
Monthly readings on new and existing home sales are also out next week and will offer more insights into the current strengths and weaknesses of the housing recovery in this crucial Spring season.
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"In a worst-case scenario, confidence could weaken further and housing starts could mark time," says Paul Diggle of Capital Economics. "But by far and away the most likely outcome is that the construction industry's growing pains are overcome and homebuilders break ground on many more sites over the next few years."