The State of Homebuilding: Home Prices
http://seekingalpha.com/article/238099-the-state-of-homebuilding-home-prices?source=qp_article
by: William Mack November 22, 2010
Today’s note is the first in a multi-part discussion of the fundamentals and my outlook for the stocks comprising the publicly-traded homebuilding industry.
Home Price Forecast for 2010 and 2011
The median home price among the 12 builders I cover should see a 2-3% year-over-year increase in 2010, to approximately $259K, from $252K in 2009. (The average home price is likely to be about $285K, around the same as in 2009.) This forecasted level would leave the group’s median price down 21% from the 2006 peak of $327K.
Average Selling Price
11E 10E 09 08 07 06
BZH $205 $215 $231 $253 $287 $285
DHI $201 $206 $213 $234 $259 $274
HOV $275 $289 $289 $305 $343 $329
KBH $198 $208 $207 $236 $262 $278
LEN $235 $248 $247 $271 $292 $300
MDC $266 $273 $278 $303 $338 $354
MTH $250 $259 $238 $268 $304 $324
NVR $294 $293 $296 $338 $373 $399
PHM $250 $259 $258 $284 $322 $337
RYL $233 $241 $245 $201 $235 $295
SPF $357 $349 $313 $336 $390 $380
TOL $545 $574 $592 $655 $672 $692
Average $276 $285 $284 $307 $340 $354
Median $250 $259 $252 $277 $313 $327
In 2011, the median home price for these large builders should be about $250K, down 3-4% from my 2010 forecast, and reversing the low single-digit percentage increase I expect for the current year. This assumes that pressure on home prices will mostly arise from only modest employment growth, but will also be impacted by the expiration of the homebuyer tax credit and foreclosures of existing homes staying at high levels. Yet among the opportunistic, large builders in my coverage, the impact on prices will be less than most people anticipate. (Evidence thus far suggests that most of the impact of the tax credit expiration will be seen in falling unit orders. For each of the builders I follow – such as Toll Brothers (TOL), yet to report October results – average unit orders have declined 25% y/y.)
Based on new home contracts in the September quarter, settlement prices to start 2011 will remain relatively firm. This is partly a reflection of tactical changes at builders, like a bias toward higher-priced, detached homes at NVR Inc. (NVR), where new contracts show a 3% price hike. Reduced sales of homes in lower-priced states, such as Arizona, Florida, and Texas, are providing a lift at Standard Pacific (SPF), where prices for its homes in backlog are up 6%, reflecting a broader geographic shift. At M.D.C. Holdings (MDC), where new orders in the September period imply a 30% average price increase, the number of new home contracts signed is stable or rising among higher-priced states, including Maryland, Virginia, and California, as the company moves away from lower-priced markets like Florida and Nevada.
Builders Tactically Managing Prices
A demographic shift is also underway. Builders have begun to lessen their reliance on first time buyers, in recognition of the fact that lower- and lower-middle income earners have been more deeply affected by the current economic slowdown than those higher on the wage scale. Lately, Meritage (MTH) has talked about stronger demand among move-up compared to first-time homebuyers. Amid tightened bank lending standards, builders (and banks) are marketing toward higher wage earners, who tend to have less difficulty qualifying for mortgages, and relatively low loan-to-value ratios. The best performing builder stocks since 2006, NVR and TOL, boast the most favorable loan-to-value levels, along with average home prices in the group’s top quartile. Since the downturn, the group’s worst performer has been Beazer (BZH), with its high loan-to-value ratios from a heavy weighting toward first-time and first move-up buyers, and average home prices in the lowest quartile.
The Existing Home Market and its Impact
As of September, sales prices of existing homes, which account for more than 80% of all units sold, had fallen 23%, to about $170K, from $222K in the peak year of 2006. This compares to the 12% peak to current price decline (to $224K at September, vs. $254K in 2006), for all new single-family homes in the U.S. This simple comparison suggests, among other things, that a relatively high proportion of the supply of existing homes must come to market, regardless of the sales environment or price. Conversely, the new home market is more sensitive to demand. That is, given unfavorable market conditions, builders have the option of foregoing the sale of a home or, as is likely, the opening of a community.
Builders typically bear the cost of not opening a community through inventory impairments, instead of in home prices. Most inventory impairments occurred in 2007-8, in anticipation of today’s foreclosures, as well as tomorrow’s shadow inventory, in my opinion. The total amount of charges for the 12 builders I follow of less than $500 million through the first nine months of 2010 (versus $12 billion in 2007) lends evidence to my view that current land values already largely reflect the moderately lower home prices I expect for 2011.
Disclosure: No positions in the stocks mentioned
AI
