A lot of bearish reports have originated from the housing market over the past several months. The existing homes sales report for May, which was recently released by the National Association of Realtors (NAR), paints a gloomy picture. Despite the 4.9 percent monthly uptick in May existing home sales, still represented a 5 percent year-on-year decline. This essentially means that May was the seventh consecutive month that existing home sales in the U.S. declined on a year-on-year basis, extending an already troubling trend.
Another worrying element in the NAR report was the uneven distribution of sales. First-time buyers, who are essential to driving healthy overall sales figures, accounted for a lesser proportion of overall sales. NAR asserts that first-time buyers accounted for 27 percent of the market in May, compared with 29 percent in April. Historical data indicates that this critical segment usually accounts for close to 40 percent of overall sales, signaling declining affordability for first-time buyers.
Beazer Homes Hit
The current bearish storm in the market will without a doubt have negative implications on Beazer Homes (NYSE: BZH), a home builder significantly exposed to the first-time buyer segment. While Beazer Homes designs homes for move-up and retirement oriented buyers, it is entry level buyers that float its boat by providing volumes that can sufficiently offset overall costs.
A decline in first-time buyer involvement in the general market therefore impacts Beazer Homes negatively. To add on to the stress, a recent report by the Bureau for Labor Statistics shows that the labor participation rate for people ages 20 through 24 hit a 42-year low in 2013. This means that fewer youth-who are the largest percentage of first-time buyers-are engaged in employment, pointing towards further declines in first-time buyer affordability.
While the outlook is dim, measures aimed at ensuring that declining affordability is arrested and that sales are generated despite increased prices are already in place. As discussed in a previous article on Emerging Growth, subprime lending is quietly creeping back. Subprime lending basically involves loosening lending criteria in order to rope in borrowers who would have otherwise been locked out of the market.
Earlier in the year, home-lending bigwig Wells Fargo (NYSE: WFC) dropped its credit score for home-purchase loans backed by the Federal Housing Administration from 640 to 600. Other lenders have also taken a more flexible approach to financing to ensure that prospective buyers do not get locked out of the market. Although subprime lending attracts its share of criticism-and it should given its central role in the 2008 financial crash-it can help drive a housing recovery if well managed. Moreover, the Fed's implied and expressed decision to leave interest rates at record lows for an extended period despite speculation that it will increase them suggests that credit will be cheap for the foreseeable future. This is likely to impede potential spikes in mortgage rates going forward, ensuring affordability for prospective buyers.
Investors can use this momentary bearishness as an opportunity to snap up stocks like Beazer Homes.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.