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Why the housing market is ripe for a multi-year recovery
Low household formation numbers that have accompanied the Great Recession weren’t due to fertility rates 25 years ago—they were due to a lousy economy.
Earnings per share (or EPS) were driven by the big increase in average selling prices, which more than offset the drop in deliveries—the increase in insurance reserves related to earlier-than-expected repairs on a completed community drove the increase.
Like most builders, PulteGroup’s increase in gross margins is driven by increases in average selling prices while input costs remain under control—the company’s average selling prices increased 12% in the second quarter, to $328,000.
The homebuilding business is highly seasonal, so investors shouldn’t read anything into the quarter-over-quarter comparisons—the increase in revenues was driven by a 12% increase in average selling prices, which offset a 9% drop in closings.
Pulte operates in 58 distinct markets throughout 28 states—the company has a large geographic footprint—much larger than most of the other builders.
The average 30-year fixed-rate mortgage increased five basis points to close at 4.32%. The ten-year yield was flat and the to-be-announced (or TBA) market sold off slightly.
This report will probably hold the hawks on the Fed at bay and allow them to continue to maintain ultra-low interest rates. The Fed wants to see annual inflation of about 2%.
The Richmond Fed Manufacturing Survey looks at business conditions in the Fed’s fifth district, which covers Washington, DC, Baltimore, Richmond, and Charlotte.
After a downward-revised reading of 0.16 in May, the index fell to 0.12 in June. The three-month moving average was +0.13. This means the economy is growing a touch above trend.
At the end of June, there were 2.3 million existing homes for sale, representing a 5.5-month supply. This is higher than the 2.16 million homes for sale last year.
Building permits cover the number of privately owned housing units that were issued permits in a given period.
Mortgage REITs, like NewCastle (NCT) and PennyMac (PMT), as well as homebuilders, like Lennar (LEN), Standard Pacific (SPF), and KB Home (KBH), pay close attention to real estate values.
Housing starts fell from a downward revised 985,000 to 893,000. Multi-family starts were 305,000 in June—a decrease from the 344,000 pace in May.
There are many reasons why a region may outperform another region. The biggest reason is usually the underlying performance of the economy.
In May, home prices rose 0.4% month-over-month. They’re up 5.5% year-over-year. Prices are now within 6.5% of their April 2007 peak.
Overall increases in consumer sentiment, however modest, are starting to drive more business for homebuilders like Lennar (LEN).
The average 30-year fixed-rate mortgage increased three basis points to close at 4.27%. The ten-year yield fell seven basis points and the To-Be-Announced (or TBA) market rallied.
Builders are in a good position right now, with tight inventory. They’re able to increase margins and drive revenue by increasing prices.
The index basically showed strong growth in the Philadelphia Fed region. This area includes eastern Philadelphia, Delaware, and southern New Jersey.
Consumer sentiment is a critical factor in risk-taking. KB Home (KBH) cited consumer confidence as a more important variable than interest rates.