Good news for the housing market, as indicated by data provided by the U.S. Department of Housing and Urban Development and the U.S. Census Bureau.
As reported by NAHB, sales of newly built single-family homes increased 4.3% in November. On a regional basis, sales of newly built single-family homes increased 20.5% in the West and 4.5% in the South while sales declined 28.6% in the Northeast and 8.6% in the Midwest.
Stronger demand for single-family homes was driven by improving general economic conditions that encourage consumers to form new households. Formation of new households, in turn, is leading to higher housing demand.
November also seemed to be favorable for the overall housing market, as data released on Dec 16 showed that housing starts (homes whose construction have just begun) increased 10.5% in November. In fact, single-family production reached the pre-recession level with a 7.6% increase, marking the highest since Jan 2008. Multifamily production increased 16.4% in November 2015.
These positive movements in the housing industry parameters reflect an improving economy, job and wage growth, moderating home price gains, rising rentals and a limited supply of inventory.
Regionally, combined single-family and multifamily starts data were mixed in November. Housing starts increased 21.3% in the South and 6.3% in the West. On the other hand, housing starts remained flat in the Midwest and but decreased 8.5% in the Northeast.
Data also showed that an 11% increase in the issuance of new building permits in November. While permits issued for multifamily homes increased 26.9%, it increased 1.1% for single-family homes. However, it must be noted that the Midwest, South and West witnessed a strong increase in permit issuance. Again, the number of permits issued remained unchanged in the Northeast.
The positive momentum in the housing industry was also reflected in the fourth-quarter fiscal 2015 (ended in November) earnings results of Lennar Corp. LEN released on Dec 18.
Lennar delivered outstanding operating results in fiscal 2015. The company is one of the best-positioned homebuilders to capitalize on the ongoing recovery, driven by its diverse revenue mix, large land supply, and above-average order growth. Moreover, its ancillary platforms – Rialto, Multi-Family, FivePoint and Financial Services – are evolving and should improve further in 2016.
However, some of the headwinds that continue to plague the housing industry include labor shortages, and rising costs of land, labor and construction. Rising land and labor costs are threatening gross margins of Lennar as well as other homebuilders like D.R. Horton, Inc. DHI, PulteGroup, Inc. PHM and KB Home KBH.
Moreover, the Federal Reserve recently raised interest rates for the first time in more than eight years at its Dec 16 meeting. The Fed increased its short-term borrowing rate to a range of 0.25% to 0.50% as policy makers unanimously voted in favor of a rate hike. A hike in the federal fund rate would probably push mortgage interest rates up.
High mortgage rates dilute the demand for new homes, as mortgage loans become expensive. This lowers a buyer’s purchasing power and can hurt homebuilders’ volumes, revenues and profits. Nonetheless, even if mortgage rates rise with interest rates, we believe they should still be within the reasonable range, thereby keeping housing rates affordable.
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