New home market stalling?

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.


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?