Tuesday, January 5th, 2010
Pending Home Sales Unveil Troubling Truth
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KB Home (NYSE:KBH), D.R. Horton, Inc. (NYSE:DHI), Pulte Homes, Inc. (NYSE:PHM) and other homebuilders could see trouble down the road after a thought-to-be-expiring housing tax credit led to a sharp drop in pending home sales for the month of November.
The Pending Home Sales Index, a forward-looking indicator based on contracts signed in November, fell a higher-than-expected 16% to 96 from an upwardly revised 114.3 in October, according to the National Association of Realtors.
The figures come in far worse than market expectations of a modest 2% loss and economist projections of a 2% gain in sales, with the thought-to-be-expired housing tax credit having taken a huge chunk out of the demand equation.
Some analysts are attempting to compare the release to November 2008, but that was a time before quantitative easing was in effect, with rates of around 6%, prices were still in freefall, and lending guidelines were still relatively unchanged and unregulated.
Instead, economists point out that this report provides a glimpse into the new “normal” in housing, with stimulus money gone and an anticipated rate increase. This could represent a problem for homebuilders as a lack of demand would lead to further reduced profits.
Even a modest recovery in the housing market could require both a reduction in foreclosures and continued low interest rates. Foreclosures in particular accounted for 40% of sales in 2009 and are seeing the most demand, and that is a trend that could continue into 2010.
For now, the housing tax credit that caused the drop has been reinstated, meaning that the homebuilder sector should expect better numbers in future quarters. But some investors are beginning to wonder if the government has created a whole new house of cards…
The Takeaway…
- Pending home sales dropped sharper-than-expected by 16% during the month of November, as consumers thought the home buyer tax credit would expire.
- While this tax credit has since been renewed, economists believe that the 16% drop may be illustrating the new norm for housing demand post-government intervention.
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-- Written by Simon Monger
