New home market stalling?

posted at 6:30 pm on March 25, 2012 by Jazz Shaw

After showing some fresh signs of life in recent months, new home construction took a bit of a tumble this past week. As Joe Weisenthal reports, construction starts had been climbing for some time, but at least one major builder – KB Homes – suddenly turned in a worse than expected earnings report.

homebuilder-sentiment

So what explains the stumble?

On Friday, shares of one major homebuilder, KB Homes, fell 8.5% after disappointing earnings.

Why the huge whiff?

We read the earnings conference call transcript at SeekingAlpha, and it makes for some interest reading for anyone interested in thes tate of the housing market.

The story spelled out by CEO Jeffrey T. Mezger is not a bad one. The company is seeing more traffic and a change in buyer confidence. In some zip codes, Metzger is confident that the market has turned around.

But there’s one thing that really slaughtered KBH this quarter: A surge in cancellations of previously placed orders, almost all due to denials by mortgage companies.

As Joe goes on to explain, KB had a sizable number of orders for new home construction on the books, but an unexpectedly large number of the prospective buyers failed to qualify for their loans from lenders other than KB’s preferred lender, MetLife. Further, in January, MetLife “suddenly” announced that they were immediately shutting down their retail mortgage lending business which further complicated the positions of buyers.

The conclusion to the article indicates what appears to be something of a dichotomy in the housing market. Consumer confidence is improving in terms of belief that home prices have finally begun to stabilize and will not plummet further. But at the same time, lender confidence appears to remain shaky at best, with mortgage brokers keeping a tighter hold on investments. I asked one of our contacts in the banking industry (who wished to comment anonymously for professional reasons) what could explain this apparent disparity.

Obviously every case is unique and we can’t speak to the specifics of what’s going on with KB’s individual customers. But in general terms, lenders have specific criteria they examine when deciding to approve a mortgage. Two of the big ones you need to consider are employment and the debt load being carried by the applicant. We’re coming out of a period of high unemployment, so many of these people applying for a mortgage may have a job now, but not a long history on that particular job. Also, people sustaining long periods out of work can run up a lot of empty debt, and until that gets paid down, it could be seen as a negative by a lender.

Add those factors together and you could have a surge in confident buyers who are looking to build new homes, but on paper they may not be passing muster. In this way, recovery in the new housing market can easily be seen as lagging behind consumer confidence, so it will take a while before the market evens out to earlier loan approval rates and new housing starts.

So what does this mean for the coming year? (I’m honestly asking here because I’m obviously no economist.) Is housing in a sustainable period of recovery and this month’s plunge is just a glitch? Or is the market going back into retreat?


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Comment pages: 1 2

HOTGAS = ONLY THE BAD ACCURATE NEWS

0bamaderangementsyndrom on March 25, 2012 at 8:15 PM

FIFY.

dominigan on March 26, 2012 at 11:43 AM

One thing is for certain, we are heading towards the right path.

liberal4life on March 25, 2012 at 6:35 PM

So we’re not actually on the right path…..but we’re getting closer to it huh?

Fighton03 on March 26, 2012 at 11:50 AM

I know some realtors in the Orlando area who tell me that a boatload of the home sales nowadays do not involve mortgages. Those who have cash are buying up properties at incredibly low prices, but even with record low interest rates a lot of mortgage applications are being rejected. I have been watching one real estate site in particular and notice a fair number of houses listed as “contract pending.” A few weeks later that note is removed and the house is back on the market. That suggests mortgage applications are being rejected.

The housing industry will be affected negatively for a long time by the massive student debt. When young people owe $1 trillion in student loans they cannot save for a down payment on a house. Their extra cash used to pay down that debt. I would assume bad news will continue for the housing industry in particular and the economy in general.

Is Romney sure he wants the job?

Colony14 on March 26, 2012 at 4:43 PM

Consumer confidence is improving in terms of belief that home prices have finally begun to stabilize and will not plummet further.

Not mine. In AZ. Just went under the 100K mark (98K) last month from an over inflated 285K. So now I’m only 50 grand under water.

“Help me Obeewama! You’re my only hope!”

Mr_Magoo on March 26, 2012 at 4:51 PM

One thing is for certain, we are heading towards the right path.

liberal4life on March 25, 2012 at 6:35 PM
So we’re not actually on the right path…..but we’re getting closer to it huh?

Fighton03 on March 26, 2012 at 11:50 AM

Yes, we’re stumbling around in the woods like The Walking Dead. Every once in a while we head towards the right path but then a noise distracts us and we head in another direction. And sometimes, people throw rocks at us!

Mr_Magoo on March 26, 2012 at 4:53 PM

Comment pages: 1 2