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Year 2012 witnessed the rebound of the homebuilding industry with major parameters like orders, number of homes closed and prices growing in double digits. The momentum slowed down in the second half of 2013, as demand softened due to rising interest/mortgage rates and increasing home prices. However, we believe the housing market should regain momentum in 2014.

The prices of homes increased significantly in 2013 on the back of increased demand for new homes. Also, homebuilding companies have been focusing on high priced larger homes in sought after locations, primarily in California, Arizona, Colorado and Florida to drive up prices.  

For instance, homebuilders like KB Home (KBH - Analyst Report) are targeting higher income, move-up buyers who are more likely to qualify for home loans. PulteGroup, Inc. (PHM - Analyst Report) is shifting its focus towards its high-priced Pulte-branded, move-up homes, which will improve its average selling price. Luxury home-builder Toll Brothers, Inc. (TOL - Analyst Report) is focused on improving the quality and the luxury quotient of its homes, which gives it a competitive advantage. Most homebuilding companies are expected to witness continued price improvement in 2014.

Changes in interest/mortgage rates are a driving force in the housing market. The spike in interest/mortgage rates since May 2013 slowed down the pace of orders and traffic in the second half of the year.  Buyers put off their purchase decision, thereby increasing cancellation rates and lowering orders for most homebuilders in the last reported quarter.

Orders declined around 17% at Pulte, 2% at D.R. Horton, Inc. (DHI - Analyst Report) and around 9% at Hovnanian Enterprises, Inc. (HOV - Snapshot Report) in the last reported quarter. Though order trends improved year over year for others like Lennar Corporation (LEN - Analyst Report) and Toll Brothers, they slowed down from the past quarter.

However, most homebuilders believe that this is temporary. They are confident of demand picking up in 2014 as buyers adjust to the higher mortgage rates and increased home prices. Also, Federal Reserve’s promise to keep interest rates low for some time despite tapering its $85 billion stimulus plan by $10 billion from Jan 2014 removes a major overhang for the homebuilders.

A slew of housing data released lately shows that housing recovery is still on. Data released by the U.S. Department of Housing and Urban Development and the U.S. Census Bureau showed that sales of newly built, single-family homes rose 25.4% in October. Another data release by the department showed that November housing starts surged to their highest in nearly six years.

The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), known as the homebuilder sentiment index, jumped 4 points to 58 in December from 54 in July. This was the seventh consecutive monthly increase in the index, showing that the recent interest rate hikes have not dampened the housing recovery completely. The Consumer Confidence Index also rebounded in December after declining in November.

 

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