Existing Housing Sales Impact Homebuilders

 |  Includes: ITB, PKB, WCIC, XHB
by: Don Dion

Despite the long and widespread downturn, it appears that the housing market is finally recovering from its lows. Numerous statistical indicators are showing signs of the housing market making a slow and steady comeback.

The change in the housing market is considered a comeback because there was housing momentum in the later part of last year and the early part of this year, but three significant factors slowed things down. The first factor was that mortgage rates began to spike. The second factor was that credit began to tighten throughout the nation. And the third factor was a limit in the supply of land and labor. Today, however, there is a rise in demand for new homes.

Reasons for a Rise in Demand for New Homes

The rise in interest rates created some alarm that demand for new homes would fall, but there are five solid reasons why this may not be a cause for concern.

First, housing remains affordable despite the rise in interest rates.

Second, interest rates may have risen but they still remain below historical levels.

Third, rentals are expected to increase as more people are looking for housing, which is a strong incentive for investors to consider building new homes.

Fourth, despite the pessimism of the mainstream media and the temporary U.S. government shut down, economic indicators show that the country is not in the doldrums and, in fact, job growth is on the rise.

Fifth, consumer confidence has increased as more people are able to get jobs, which results in them willing to spend money now rather than hoard it for a rainy day. Moreover, the fact that we are still living in inflationary times - the purchasing power of money continues to decline - means that the idea of savings is no longer appealing. Buying a new home seems like a good idea.

Low Home Inventories Spiking Demand

It's an economic fact of life that scarcity of any good or services inevitably results in an increased demand for it. Consumers want to buy what they can before supply runs out. This is exactly what is happening in the housing market. With land and labor shortages restricting new home construction, there is a constraint in supply.

Consequently, home inventories continue to be low for both single and multifamily homes. Since market demand is up and supply is limited, home prices are rising. Thin home inventories are feeding the housing momentum. There is a sense of urgency and anxiety amongst homebuyers who want to buy now before prices shoot up even more.

Homebuilders Positively Impacted By Existing Housing Trends

Homebuilders are also benefiting from the housing momentum, and they are noticing a surge in volume and average selling price. There is a climb from one year to the next for new home orders, for end-of-year homes still under sales contracts, and for the number of homes that are delivered. Besides reasons for current optimism, homebuilders are also optimistic about the housing momentum continuing into next year. They feel the trend will continue because margins have been boosted by improved revenues, there are tighter cost controls, and there is more leverage on overhead due to volume.


Homebuilders who will do well in 2014 are those who have good positions this year. These homebuilders have available land so they are not constrained by land limitations. They are also focusing on high-end communities that are driving up prices. These are primarily located in the sunnier states like Arizona, California, Colorado and Florida. Additionally, homebuilders that will prosper in 2014 are already implementing cost-saving initiatives and doing some strategic restructuring.

Investors would be wise to consider the following stocks in this growing sector; WCI Communities (NYSE:WCIC) and Taylor Morrison (NYSE:TMHC), which have all recently gone public and don't have a lot of the legacy issues that other builders have from the Great Recession.

Disclosure: I am long WCIC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.