The ongoing recovery of the housing market keeps the stocks of leading home-builders such as D.R. Horton, Inc. (NYSE:DHI) and Lennar Corporation (NYSE:LEN) rising. But is there a sharp rise in demand for housing? Or are we just entering into another housing bubble? Let’s check out the recent developments in the housing market and try to figure out what’s ahead for housing.
Housing Starts continue to rise
Based on the latest report by the U.S Census Bureau and U.S Department of Housing and Urban Development, the number of housing starts sharply rose during March by 7% and reached 1 million. This number is nearly 47% higher than the same time in 2012.
The chart below presents the sharp rise in the housing starts in the past year
The rise in housing starts is also accompanied by the ongoing rally in the number of new homes sold.
New homes sold rose in March
The number of new homes sold also rose in March compared to February: sales of new homes increased by 1.5% and by 18.5%, respectively, compared to March 2012. Based on the above, we can see that during the year the number of houses sold has risen at a slower pace than the number of housing starts has. Down the line, this could loosen up the housing market and thus pull home prices down.
In the meantime, the rise in home sales is also reflected in the price of homes that grew during the year, climbing 3%. The median price is highly volatile, as indicated in the chart below, but it also suggests the sharp rise in home sales didn’t pressure the home prices up by much. This might suggest that the pressures from the demand aren’t so strong as to push the prices too high.
Let’s examine how several home builders are doing in terms of revenue growth and profit margins.
The sharp rise in housing starts and sales of new homes are also reflected in the stock market: shares of D.R. Horton, Inc. (NYSE:DHI) spiked by nearly 24% (year-to-date). Moreover, the company’s upcoming financial report for the second quarter of 2013 (fiscal year) is likely to reflect steady revenue growth and a rise in profit margin. At least that was the case for Lennar Corporation (NYSE:LEN). The company’s operating profitability rose in the recent quarter to 5.4%, compared with only a 1.2% profit margin in the parallel quarter a year back. The chart below presents the developments in the quarterly operating profitability of these two leading home builders.
Moreover, Lennar Corporation (NYSE:LEN)’s revenue spiked in the second quarter of 2013 by more than 36% compared to the second quarter in 2012. The sharp rise in profit margin and revenue suggest that other home builders such as D.R. Horton, Inc. (NYSE:DHI) are likely to show a good quarter as well.
The Fed’s quantitative easing, which includes the purchase of $40 billion a month of mortgage-backed securities, flooded the markets with cash to help home builders and banks to offer mortgages. This policy, along with the Fed’s ongoing monetary policy to keep rates low and buy long-term securities, has pulled down the mortgage rate to its current low level as indicated in the chart below.
Despite the low mortgage rates, mortgage debt hasn’t grown in recent years and continues to dwindle, as seen in the chart below.
Home builders and banks
Does this mean that home builders and banks don’t see much growth in their mortgage business? This is the case for Wells Fargo & Co (NYSE:WFC), one of the leading U.S banks in terms of mortgages.
In comparison, the bank’s revenue from other business segments, including wholesale banking and wealth, brokerage and retirement rose during the last quarter by 0.9% and 4.4%, respectively. This means the community banking segment was the group that dragged down this bank’s total revenue during the last quarter.
Home builders have also been offering mortgages to their clients. And they have shown growth in their financial services revenues. Lennar Corporation (NYSE:LEN)’s revenue from financial services grew by more than 40% in the first quarter of 2013 compared to the same quarter in 2012. Alas, this segment accounts for less than 10% of the company’s total revenue.
D.R. Horton, Inc. (NYSE:DHI) has a smaller financial-services segment that reached in the last quarter of 2012 nearly $42 million – an increase of nearly 100% compared to the same quarter a year earlier.
But the rise in home-builders’ revenues in both housing and financial services might reach a halt or at least start to slow down, if and when the Fed will stop or ease its current expanding monetary policy.
Fed policy
The Fed’s quantitative easing might end in 2013. The upcoming FOMC meeting (at the end of April) might shed some light on this issue. If the Fed will pull back from its current policy, we might see a slowdown in the housing market. I don’t think the Fed will be that careless and end its current asset-purchase program without replacing it with a different policy, or at least ease into this exit strategy.
Moreover, the implementation of the sequester was most likely a preview for the future policy of government to lower U.S debt by executing spending cuts and tax increases that might lower the demand for housing and slowdown the economy.
Even the recent hype over University of Massachusetts economists, who refuted the study done by Reinhart-Rogoff (by showing that austerity measures aren’t necessarily needed to rally a high debt economy), won’t help shift U.S policymakers from cutting the U.S budget deficit. Therefore, we might see a slowdown in the housing market as the year progresses that will reflect in the profits and revenue growth of home builders and banks.
The bottom line
I don’t think there is a clear answer as to when or if the housing market will change course. But I do think the Fed is one of the reasons for the recent recovery of the housing market. Once the Fed changes its policy, we might see a shift housing that will adversely affect leading home builders.
The article Is It Time to Get out of the Housing Market? originally appeared on Fool.com.
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