Credit Suisse (CS) released its March housing data yesterday, and the results are not promising. This survey rates the climate for single family home transactions in fifty major U.S. markets coast to coast. I have found this survey to be both timely and predictive.
Significantly, buyer traffic slipped in March from previous months, which were already low. The survey suggests that buyers lack confidence and are continuing to believe that home prices will continue to decline. The survey notes the "wide divide among potential buyers, with the most distressed markets finding significant investor interest whereas (traditional) buyers in other markets are still cautious and plan to wait for home prices to bottom." Investors are paying cash as they take advantage of homeowners caving in to low ball offers and investors who jumped in too early in the housing decline and are cash strapped. Home buyers planning to live in a home are finding it very difficult to obtain an appraisal that meets their home offer price and then are faced with extremely tight lending practices that close the mortgage window. Foreclosures are still a high percentage of property transactions with no letup seen over the next several months.
With this scenario, prices will trend lower, but perhaps not in as rapid a decline as 2009/10.Credit Suisse anticipates additional weakness in the coming months (generally a good sales season). This poses continuing problems for home builders.
The latest home builder stock ratings from Credit Suisse reflects this scenario:
Beazer Homes (BZH) Neutral, Target $4.00
DR Horton (DHI) Neutral, Target $10.00
Hovnanian Enterprises (HOV), Underperform, Target $2.00
KB Home (KBH), Underperform, Target $12.00
Lennar (LEN), Neutral, Target $19.00
M.D.C. Holdings (MDC),Outperform, Target $28.00
Meritage Corp (MTH), Neutral, Target $22.00
NVR Inc. (NVR), Neutral, Target $650.00
Pulte (PHM), Neutral, Target $7.50
Ryland Group (RYL), Underperform, Target $15.00
Toll Brothers (TOL), Neutral, Target $20.00
Of concern looking ahead is the possibility of real estate deductions (especially mortgage interest deductions) being on the table as Congress attempts to control the budget deficit, a double dip recession sparked by inflation and the cost of gasoline and heating oil, competition in the rental market from construction of new apartment complexes to accommodate increased public subsidized housing patrons and a new class of renters that ordinarily would finance/purchase a home, and the overall uncertainty with the economy in general and personal income in particular.
Investors itching to pull the trigger on home builder stocks may want to wait a while longer. Hands-on landlords who can fathom a solid return even without long-standing preferential tax treatment of rental real estate may want to selectively purchase well-located property if the price is compelling.