The Economist I June 29, 2013
THE stronger-than-expected 53% growth in quarterly sales reported on June 25th by Lennar, America’s biggest homebuilder by market capitalisation, is the latest evidence that the country’s housing market is recovering from its mid-decade meltdown. On the same day the Commerce Department reported that 476,000 new homes were sold nationwide in May, the third month in a row that sales have grown and the highest monthly total since July 2008. The S&P/Case-Shiller index of house prices in the 20 largest metropolitan areas beat expectations by rising by 1.7% (seasonally adjusted) in April and 12.1% year on year, the strongest annual growth since the market peaked in 2006.
Shares in the 12 largest publicly traded homebuilders have risen by over 150% since hitting bottom in February 2009, according to Goldman Sachs, whose analysts this week published their first research on the industry since abandoning it during the downturn. Though all this adds up to a significant rebound, it is modest in the context of the stockmarket rollercoaster ride that preceded it. Shares in homebuilders increased twelvefold in value from January 2000 to July 2005, only to fall by 85% as the housing market collapsed.
Since housing starts have been so weak at a time of population growth, there is plenty of scope for builders to increase production while also raising prices, reckons Stewart Miller, the boss of Lennar. Whereas other builders may be held back by a lack of land to build on, Mr Miller says his firm has been busy buying it, and is thus positioned for growth.
The Goldman Sachs analysts think that Lennar’s potential is already priced into its shares, and are more excited about the prospects of Toll Brothers, now the fourth-biggest homebuilder by market capitalisation, and two smaller firms, Ryland and Meritage. This is because they have greater exposure to cities where housing demand is expected to grow most—such as Charlotte, Jacksonville and Orlando—and less exposure to potentially slower markets such as New York, Philadelphia and Chicago. These firms also sell a high proportion of their homes to richer people who are not first-time buyers. Such customers tend to be more optimistic that the recovery in house prices will continue; and they are less affected by any regulatory reform of Fannie Mae, Freddie Mac and the rest of the government’s mortgage-subsidy apparatus, which could make it harder for poorer people to get loans.
A more immediate worry is that the prospect of tighter monetary policy by the Federal Reserve will accelerate the recent uptick in long-term mortgage rates, and snuff out the revival in demand for housing. For now, such fears seem premature. The downward revision of America’s already tepid rate of GDP growth in the first quarter, reported on June 26th, will probably ensure that the day when the Fed raises short-term interest rates remains distant. Mortgage costs relative to annual incomes are still extremely low (around 17% compared with a historic average of almost 24%), so there is scope for mortgage rates to rise further without choking off the nascent recovery.
And what of the opposite fear, that a new housing bubble may be forming? There are various reasons not to worry about this, from tougher lending practices to buyers who are once bitten, twice shy, says Robert Shiller, an economist at Yale whose book on bubbles inspired Alan Greenspan, a former Fed chief, to coin the phrase “irrational exuberance”. However, he adds ominously that “economists tend to underestimate the role that the media plays in inflating and bursting bubbles, and in the past few weeks a lot of news outlets have decided that rising house prices are a great story.” If prices do continue to rise strongly, how long before homebuilders abandon their caution and join the house party?