Weakness Prevails in U.S. Housing

The weaknesses prevailing in the housing and construction industry in the U.S. have once again come to the fore as the National Association of Home Builders lowered its September outlook.

Poor employment growth, increased availability of foreclosed homes, strict mortgage lending rules and lower confidence have restricted the demand for new homes to an all-time low. Moreover, potential customers who are ready to buy homes are opting for pre-owned homes, given their affordable pricing.

As a result, the purchases of pre-owned homes have increased almost 2% year over year during August to 5.03 million (annual rate), which in turn affected new home sales. New home sales for August were at a six-month low of 294,000 units (annualized growth).

This trend has affected earnings in the recent quarters and is also feared to have unfavorable effects on future business prospects. Home sales in the last reported quarter have declined for almost all the big homebuilders of the country including DR Horton Inc. (DHI - Analyst Report), PulteGroup, Inc. (PHM - Analyst Report),  Meritage Homes Corporation (MTH - Snapshot Report), Louisiana-Pacific Corporation (LPX - Snapshot Report) and KB Home (KBH - Analyst Report).

The building materials industry also remained under pressure driven by lower demand for aggregates, asphalt and cement. The homebuilders are being forced to sell properties at lower prices given the excessive availability of unsold repossessed properties in the market.

Gauging the severity of the situation, the Federal Reserve intends to undertake certain initiatives to help improve the present condition. In order to reduce borrowing costs, the Federal Reserve had announced the purchase of bonds worth $400 million through June with maturities of six to thirty years, while selling an equal amount of debt maturing in three years or less.

In addition, the Federal Reserve also plans to reinvest maturing mortgage debt into mortgage-backed securities instead of Treasury securities to encourage housing and refinancing.

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