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Purchase activity is picking up, good news for builders

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The MBA Purchase Index rose 1.1% for the week ending November 7

The Mortgage Bankers Association (or MBA) Purchase Index increased 1.1% last week as bonds rallied. We’re entering the seasonally slow period for the real estate sector that pretty much lasts as long as the football season.

Unlike the MBA Refinance Index, the MBA Purchase Index is driven by seasonal factors. The purchase index somewhat understates the true activity going on in the market, as professionals who are cash buyers have been responsible for a large chunk of the buying. The index won’t count their activity. For mortgage bankers, this could be a tough season, as they won’t have refinance activity to fall back on. Indeed, many of the big mortgage bankers have announced job cuts in their mortgage units.

MBA Purchase Index

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Ever since rates bottomed out last year, the MBA Purchase Index has declined much less than the refinance index. This steadiness is largely because homebuyers tend to be less interest-rate-sensitive than refinances, which are 100% interest-rate-driven. Higher interest rates aren’t expected to impact purchase activity the way they affect refinance activity. Despite the rise in rates, housing remains highly affordable, though less affordable than it was two years ago.

Implications for homebuilders

We’re coming up on earnings season for the builders. So far, most have reported good earnings. Average selling prices are rising, but volumes are decreasing. That said, there’s still restricted supply. While housing is rebounding, it’s important to remember that these numbers are coming from an extremely depressed base. Prior to the housing bust, we only rarely observed a housing starts number below 1 million, usually at the lowest point of a recession. We’re only recently hitting numbers above 1 million.

Homebuilders such as Lennar (LEN), D. R. Horton (DHI), Toll Brothers (TOL), PulteGroup (PHM), and Standard Pacific Homes (SPF) have leveled off, but we’re still very early in the housing recovery. This is because first-time homebuyers have been absent due to tough credit conditions and a difficult labor market. As those circumstances change, the market will release a lot of pent-up demand, which should drive homebuilder earnings for quite some time.

Investors interested in trading the builders as a sector should take a look at the Standard & Poors depositary receipt (or SPDR) Homebuilder exchange-traded fund (or ETF) (XHB).

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