The last several months have seen a real change in sentiment towards the homebuilder industry.
This chart from Nomura shows how homebuilder sentiment in all regions really started taking off late last year.
Homebulider stocks have gone on a similar ride.
This chart of the homebuilder ETF (via stockcharts.com) shows how the group has really taken off like a rocket since last fall.
So has the industry gotten ahead of itself?
On Friday, shares of one major homebuilder, KB Homes, fell 8.5% after disappointing earnings.
Why the huge whiff?
We read the earnings conference call transcript at SeekingAlpha, and it makes for some interest reading for anyone interested in the state of the housing market.
The story spelled out by CEO Jeffrey T. Mezger is not a bad one. The company is seeing more traffic and a change in buyer confidence. In some zip codes, Metzger is confident that the market has turned around.
But there’s one thing that really slaughtered KBH this quarter: A surge in cancellations of previously placed orders, almost all due to denials by mortgage companies.
While our gross orders and traffic were up year-over-year, net orders in the first quarter were 1,197 compared to 1,302 in the prior year, a decrease of 8% or 105 homes. There were 3 key factors behind this negative result that I will review: first, a spike in the cancellation rate due to the unpredictability and lack of performance by mortgage companies other than our preferred lender, MetLife; second, our deliberate focus on improving gross margins; and third, the impact of our strategic shift in geographic footprint, all of which affected our sales results and year-over-year comparable for the quarter.
On our last earnings call, we shared with you that we missed deliveries that we had expected in the fourth quarter as a result of the nonperformance of outside lenders, which is a reference to mortgage lenders other than MetLife. As December progressed and we diligently worked to close these homes, we learned that even though the majority of these buyers had preliminary or full loan approval letters, the lenders subsequently changed their commitment and would not fund the loan, and therefore the customer could not perform. In many instances, we could not resolve the situation with our buyer and eventually canceled the sale. In addition, MetLife unexpectedly announced in the first week of January that they were immediately shutting down their retail mortgage operations, further impacting our customers’ ability to perform. As a result of all of these, we experienced excessive cancellations versus our expectations in the range of 140 during the quarter.
This has been a big part of the housing non-recovery: The fact that the mortgage market appears to still be unpredictable and not easy to access for many buyers.
Still, there are some definite unalloyed positive takeaways from the call…
As I’ve said many times on these calls, jobs and consumer confidence will be the key drivers of the housing recovery, and both of these are trending positive right now. In fact, consumer confidence is the highest it has been in 4 years, underscoring what we are seeing on the ground in our markets. Although the housing recovery is uneven and very localised, in some cases literally ZIP code by ZIP code, inventories of unsold homes continue to ease and prices have stabilised in many markets across the country. Affordability is strong, with compelling prices and historically low interest rates.
In some of our submarkets, we are finding that homebuyers are no longer expecting home prices to decline further, which is creating some sense of urgency to buy now. Additionally, as rents continue to increase, prospective customers in many areas are now recognising that they can own a home for a monthly payment lower than their rent. It is now common for me to hear anecdotes regarding the customer who is visiting our sales office because their rent just increased.
So while the mortgage situation is not a plus, this report is not enough to derail the idea that this market is turning around.
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