Beazer Homes USA (NYSE: BZH) has declined 21 percent on the stock market year-to-date. This downward swing has predominantly been driven by the slowdown in the U.S. housing recovery. Although increasing home prices, a key component of the housing recovery, have been essential in securing plum profits for home builders, the prices have, over the past several months, risen at a faster pace than expected, making homes unaffordable and consequently slackening sales momentum.
While there were some pockets of bullishness from Beazer Homes' most recent Q2 2014 earnings call, including a jump in adjusted EBITDA (earnings before income tax depreciation and amortization) to $18.5 million from $15.2 million in the year-ago quarter, overall sales figures conformed to the now familiar downward facing trajectory.
Total revenue for the quarter ending March 31, 2014 was $270 million, which despite being marginally shy of the $291 million posted in the quarter ending December 31, 2013, was outstandingly lower than the $483 million posted in the quarter ending September 31, 2013, signaling a continual decline in sales over the past half year.
Decreased Affordability an Industry-Wide Problem
Beazer Homes is not the only home builder struggling with declining sales. Other players, too, are grappling with the same problem. In March, for instance, sales of previously owned homes in the U.S. declined 7.5 percent when compared to the same period a year earlier, marking the slowest pace in 20 months.
The average 30-year mortgage rate as at May 22 was 4.14 percent, according to a statement by mortgage buyer Freddie Mac. While a rate of 4.14 percent represents a slight decline from the 4.33 percent in late April, it is still a full percentage point above record low rates last year.
Rising home prices, coupled with high rates, as well as the possibility that rates could increase further in view of the continued bond buying taper by the Fed, have made homes unaffordable for many Americans. In 20 of the 100 largest metro areas, a majority of homes on the market are not affordable for middle-income buyers, according to a study by real estate research firm Trulia.
Shrinking affordability has slowed sales momentum not only for Beazer Homes, but for other home builders as well.
Why Should You Buy Beazer Homes?
The slowdown in U.S. home sales is a momentary pullback in an otherwise upward tending curve. This is because recent developments suggest that affordability, and as a result sales, could be restored despite continued upward movements in price levels and mortgage rates.
Subprime lending, the practice of loosening lending criteria to accommodate borrowers who would have otherwise been locked out of the mortgage market, is creeping back. Wells Fargo (NYSE: WFC), for instance, dropped its entry-level credit score for home-purchase loans backed by the Federal Housing Administration from 640 to 600 earlier in the year. Moreover, lenders have said that the kind of subprime loans they are currently giving now are not the same as the ones which stirred the 2008 financial crisis. By this statement, regulators may be favorably inclined to accommodate subprime lending going forward, allowing more lenders to engage in the practice. This means that the possibility that more home lenders could revise their criteria to rope in borrowers with lower credit and increase home sales is high.
Similarly, a growing body of legislators in Washington is showing support for legislation that allows Americans to refinance their federal student loans at lower interest rates, including Lawrence Summers, a former White House advisor who previously led President Barack Obama's National Economic Council. This legislation, if passed, is expected to increase home affordability. Although there is still no decisive academic evidence that clearly outlines a causal effect between higher student debt and a weak economy, the high interests on student loans in the past years is preventing many households from spending money on homes and instead limiting their expenditure to loan repayments. This has had a tremendous impact considering student loan debt currently exceeds the amounts Americans owe on credit cards.
While the possibility of legislation that imposes lower interest rates on student loans is still mere speculation, and further still, its impact on home sales if passed untested, the return of subprime lending will have a notable impact on home sales. This could provide sufficient impetus to drive Beazer Homes on a rally that will not only offset this year's slump on the stock market, but push the shares into new trading territory. This possibility has not yet been priced into Beazer Homes stock, signaling a good entry point for investors.