Home builders

Investors unsure of homebuilder foundations

This should be a great year for homebuilders in the United States. Convincing investors of this could take time.

Homebuilding ended 2021 on a high note; the Commerce Department announced on Wednesday that construction was started on 1.7 million seasonally adjusted households, on an annual basis, in December, compared to 1.68 million in November. In 2021, 1.6 million homes were started, marking the biggest year for housing starts since 2006.

This strength seems to have been retained at the beginning of this year. 1.87 million building permits were issued last month, seasonally adjusted, compared to 1.72 million in November. By now, the ground has been laid on many of these projects.

Separately, the National Association of Home Builders said on Tuesday that its constructor sentiment measure fell slightly this month, to 83 from 84 in December. It’s still a strong read; any index above 50 indicates that more builders rate the housing environment as good than bad. Even during the boom of the early 2000s, the index was not as strong as it is today. A sub-index of home viewings by potential buyers also fell only slightly, which is remarkable considering how the rise of the Omicron coronavirus variant may have led some people to postpone viewing homes.

Also, last week, builder KB Home

reported results for its fourth fiscal quarter ended in November which is well ahead of analysts’ estimates and, perhaps more importantly, provided a good outlook for its current fiscal year. Notably, the company said the average sale price of its homes would be $480,000 to $490,000, up from $422,700 last year, and its profit margin would increase significantly.

This all sounds very rosy, but any optimism among investors about homebuilders is likely tempered by two related concerns. The first is house prices, which seem very high. In November, the median selling price of a new home was $416,900, according to the Commerce Department, compared to $331,800 in February 2020, before the pandemic hit. Rising material and labor costs are part of the reason prices have risen so much, but it remains to be seen how much people will be able to afford in the coming year.

Which brings us to the second concern: interest rates. The Federal Reserve could start raising its target range on overnight rates as early as March, and expectations that monetary policy will be tighter in the future have started to drive up long-term interest rates. Buying a house at a high price is much easier when rates are extremely low than when they are not.

Even with these price and interest rate headwinds, homebuilders could still do just fine. In the years following the housing crisis, house building slowed considerably. From now on, the limited supply of available accommodation is coming up against a very strong demand. The pandemic has helped rekindle Americans’ taste for home ownership, and with millennials settling in and a buoyant job market driving up incomes, the housing backdrop could remain very supportive.

But investors might need to see housing perform well in the face of rising rates before believing that. Homebuilders’ results could outperform their stock prices until they do.

US home prices hit a record high in 2021, but those increases are expected to slow in 2022 thanks to a number of economic factors. Here’s what’s driving the housing market and what it could mean for potential buyers and sellers. Photo: George Frey/Bloomberg News

Write to Justin Lahart at [email protected]

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Appeared in the January 20, 2022 print edition as “Home Builders’ Future Looks Rosy”.