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July 22, 2013 5:52 pm
California housebuilder UCP got a cold reception after its market debut late last week amid investor concerns that US residential construction companies rest on shaky foundations.
Not only did UCP price its initial public offering at the bottom end of its expected range, its shares then fell almost 7 per cent on its first trading day.
Shares in housebuilders have risen sharply in the past year but have lost some of their lustre of late. Fears that mortgage interest rate rises might lead to waning demand for houses and restrain the recovery in US housing – a sector that has so far been a bright spot in the world’s largest economy – has sent the S&P 500 homebuilders index down more than 20 per cent from their May high.
In spite of rising demand for new homes and a jump in housebuilder confidence, recent weak data on mortgage applications and new residential construction threaten to cause further share volatility, according to analysts.
As some of the country’s largest housebuilders such as DR Horton and PulteGroup report their second-quarter earnings this week, industry watchers will be keeping an eye on order growth numbers and cancellation rates to determine the impact of interest rate hikes on future demand.
“While the second quarter might be safe, we have to look for indications as to what rate increases mean for the rest of the year,” says Alex Barron, a senior research analyst at Texas-based Housing Research Center. “June and July sales will be the ones to watch. We could see lower revenues, earnings and missed expectations in the future.”
But even against the unsettled backdrop, expectations for the second-quarter results still remain positive. Housebuilders are forecast to report a 43 per cent increase in sales growth on average from last year, driven by a hefty backlog of orders and rising prices, particularly as more Americans try to lock in the best deals. Lennar and KB Home, which have been among the first to report, posted even higher increases of 58 per cent and 74 per cent respectively.
Still relatively low interest rates, a slowly improving jobs market and greater consumer confidence have spurred more Americans to buy houses and these buyers are turning to new construction amid rapidly depleting inventories of existing homes for sale. Economists say the rise in rates is not enough to derail the housing rebound.
In June, housing starts – the beginning of construction of a new building – ran at an annualised rate of 836,000. Despite gains over the past year, they remain greatly below their 2006 peak of an annualised rate of nearly 2.3m. Economists estimate that about 1.7m new homes are needed each year to accommodate additional households and replace older structures.
What has been of greater concern to housebuilders has been land and skilled labour shortages and still high construction materials costs that have created supply chain roadblocks. With development plots becoming increasingly difficult to find, some builders are intentionally slowing down the pace of home sales and ratcheting up prices.
“They would rather push pricing than increase the volume of their sales. We have seen much more of this recently particularly in land-constrained markets,” says Drew Reading, analyst at Bloomberg Industries. “Margins over the past few years have been very depressed, so this is helping to boost profitability.”
Analysts say the backlog of orders, which reached their highest level since 2008 during the first quarter, should propel new home closings – the final step in executing a property transaction – and improved revenue growth in the second. Coupled with higher average selling prices this should expand margins.
The average selling price rose 16 per cent and 9 per cent in the first and previous fourth quarter respectively, year on year, and they are likely to increase further. “Existing inventories are so low that buyers have no choice but to pay up,” Mr Reading adds
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