For homebuilders, 'the next few months are big'

  • Sales of newly built homes fall sharply in January, down nearly 7 percent month to month and down 4 percent compared with January 2018, according to the U.S. Census.
  • This is a surprise, as builder sentiment jumps in January, according to the National Association of Home Builders.
  • The price of a newly built home sold in January declines 3.8 percent, but that is more due to a shift in the mix of homes selling, not builders reducing prices.
A contractor installs a door header inside a house under construction for Ironwood Homes in Peoria, Illinois.
Daniel Acker | Bloomberg | Getty Images
A contractor installs a door header inside a house under construction for Ironwood Homes in Peoria, Illinois.

Builders claim they're feeling better about their business, but the sales numbers are still not reflecting that. So all eyes are on the spring market, which could determine the fate of both the stocks and the earnings of the biggest builders.

Sales of newly built homes fell sharply in January, down nearly 7 percent month to month and down 4 percent compared with January 2018, according to the U.S. Census. This was a surprise, as builder sentiment jumped in January, according to the National Association of Home Builders.

"We all know that the pace of housing transactions has slowed to no growth as high home prices combined with higher mortgage rates froze behavior," said Peter Boockvar, chief investment officer at Bleakley Advisory Group. "Now with the latter seeing relief, the next few months are big in measuring the state of the industry and consumer taste for big-ticket, life-altering decisions."

The average rate on the 30-year fixed mortgage jumped more than 5 percent in November but fell back in December. It continued falling in January and has now settled around 4.5 percent, according to Mortgage News Daily. Mortgage applications to purchase a home, however, are basically flat compared with a year ago, according to the Mortgage Bankers Association. Sales of existing homes appear to be picking up, but new homes come at a price premium, and today's buyers are already stretched financially.

The price of a newly built home sold in January did decline 3.8 percent, but that was more due to a shift in the mix of homes selling, not builders reducing prices. About 37 percent of sales were of homes just below the median price, a far greater share than a year ago, when only 27 percent of sales were below the median.

"Although existing home buyers are capitalizing on the recent decline in mortgage rates, it didn't spark buyer interest in new homes in January," said Danielle Hale, chief economist for Realtor.com. "Given the rising cost pressures builders are facing, this could suggest continued difficulty for new homes and new construction ahead."

The supply of newly built homes also rose to a three-month high, and analysts report a growing number of so-called "spec" homes, or homes being built without buyers. During the housing crash, builders were only building homes that already had buyers under contract. As sales weaken, builders could be sitting on more unsold homes, which will cost them in both taxes and maintenance.

The data on new home sales is volatile, according to the Census itself, and a three-month average puts sales at the highest level since June. Both sales and construction, however, are well below historical norms, and demand has been incredibly sensitive recently to interest rates. While builders report strong expectations for sales over the next six months, they are also reporting disappointing buyer traffic through their model homes.