Builder Confidence Rebounds
Builder confidence for newly built single-family homes rebounded in October, erasing hurricane-borne losses in September, the National Association of Home Builders reported yesterday.
The NAHB/Wells Fargo Housing Market Index rose by four points to 68 in October, the highest reading since May and canceling out September’s three-point decline. All three HMI components posted gains in October. The component gauging current sales conditions rose five points to 75 and the index charting sales expectations in the next six months increased five points to 78. Meanwhile, the component measuring buyer traffic ticked up a single point to 48.
Regionally, the South rose two points to 68 and the Northeast rose one point to 50. Both the West and Midwest remained unchanged at 77 and 63, respectively.
“While October confidence showed resiliency, longer-term hurricane issues may still cause problems,” said Mark Vitner, senior economist with Wells Fargo Securities, Charlotte N.C. “Potential concerns include higher materials prices and even keener labor shortages due to increased demand for repair work following the storms.”
NAHB Chairman Granger MacDonald agreed. “This month’s report shows that home builders are rebounding from the initial shock of the hurricanes,” he said. “However, builders need to be mindful of long-term repercussions from the storms, such as intensified material price increases and labor shortages.”
The hurricanes hit home builders hard. Last week, the Mortgage Bankers Association reported mortgage applications for new home purchases fell by 7.5 percent in September. The monthly MBA Builder Applications Survey said mortgage applications for new home purchases decreased 7.5 percent from a year ago; from August, applications fell by 20 percent, unadjusted for typical seasonal patterns.
“Applications for new home purchases were down year over year in large part due the impacts of hurricane activity,” said MBA Vice President of Research and Economics Lynn Fisher. “In particular monthly applications fell by 37 percent in Florida and 11 percent in Texas, which account for a large share of the applications in the survey.”
In a separate report, Fitch Ratings, New York, said even in recovery, major home builders are still “reeling.” The report said high leverage and a heavy debt burden have left some U.S. home builders still struggling six years into the housing recovery. While most home builders in Fitch’s coverage have improved credit metrics and balance sheets but a few issuers have yet to bounce back amid more favorable operating conditions.
The report noted Hovnanian Enterprises Inc. and Beazer Homes USA Inc. entered the downturn carrying heavy debt, which significantly put pressure on their balance sheets. Leverage remains elevated and high interest payments have strained cash flow. Hovnavian’s debt/capitalization ratio was above 100%, while Beazer’s ratio was 68.1%, as of the most recent quarter. Fitch’s rated universe average is 42%.
“Fitch expects the housing recovery to continue through at least 2018 although rising land, labor and material costs will pressure profits,” said Robert Rulla, Fitch corporate director of finance.
