Public builders set stage one in housing's recovery
UBS analyst David Goldberg sees home building's recovery in three stages, the first being the one we're currently in, which calls for "improvements in prime locations." This means a few important things in the housing recovery narrative, but the most important one is that--like just about everything else we're hearing about these days--the good trends for home builders are not there for everybody and not there forever.
Among the dozen or so publicly-traded home builders, access to lots and capital have given them a jumpstart out of the gate in many of what Goldberg describes as "prime locations." The question now, after about a year of highly favorable comparables, what do these big public builders have left in their bags of tricks? Will they be able to sustain the volume and margins they've painstakingly achieved?
- Will the publics be able to access a lot pipeline to open new communities in "prime markets" with sustainable price power?
- Will the pool of discretionary buyers increase as demand picks up for normally-priced existing home stock?
- How long can mojo go when entry-level, first-time buyers are hamstrung by credit and down payment qualifications they can't achieve?
- Can well-capitalized private companies work the niches in these "prime locations" without over-extending on land debt?
Here, Calculated Risk's Bill McBride taps into data compiled by his colleague Tom Lawler on the big builders' latest quarter operational metrics:
McBride and Lawler both benchmark the big builders' year-on-year operational gains as evidence of housing's recovery taking on a life of its own. The percentages of improvement from 2011 to 2012 are dramatic, but they started from a very low base.
Meanwhile, D.R. Horton ceo Don Tomnitz warns in a Bloomberg report that those who think housing's about to blast off should curb their enthusiasm.
“I still don’t see a lot of jobs being created,” CEO Donald Tomnitz said during a conference call today. “And I also see the fact that there are potential layoffs in a number of industries, especially the defense industry.”
We think that Goldberg's three-phase recovery map makes sense. After the first phase of "improvements in prime markets," Goldberg sees this for the trajectory:
We expect positive sentiment around housing to persist for 6-9 months.
Thereafter, we forecast a slow transition to stage 2, as the recovery spreads into the
periphery where supply and mtg mkt constraints govern the pace of improvement.
Stage 3, Goldberg suggests: "Infinity and Beyond?"