Homebuilders Betting on Long-Term Housing Surge

With rising home prices, shrinking inventory, and record low mortgage rates, the homebuilding industry is finally picking up some steam. Investors are buying in to homebuilding stocks in unheard of numbers; stock shares in the homebuilding sector have surged nearly 50 percent, on average, in 2012.

The past five years have not been pretty for our nation’s homebuilders. But momentum has been growing in the housing sector, and the homebuilder’s confidence has reached pre-crash levels, according to the latest survey from the National Association of Homebuilders.

Homebuilding Stock Rebounds

The homebuilding rebound can be attributed to a couple of factors:

  • housing prices bottomed out and are now on the rise
  • orders for new homes have risen every quarter since the third quarter of 2011
  • pent-up demand
  • shrinking inventory
  • mortgage rates hitting consecutive record lows

Foreclosures have acted as a bottle neck for housing prices and inventory for the past five years. But now, investors have started scooping up foreclosed properties, so they can cash in on rental rates, or flip properties and sell them for a great profit. In cities where the housing crash devastated the local real estate market, investors have been purchasing foreclosed properties in volume.

Places that used to be flooded with foreclosures now have nothing available on the market. If a property happens to become available in these neighborhoods, it usually gets picked up right away with multiple offers.

From Neutral to Attractive

Many potential homebuyers who sat on the fence for the past few years are now jumping into the market. With growing demand and shrinking availability of previously owned homes, these homebuyers are hiring more homebuilding contractors. The pace of new starts has climbed to a seasonally adjusted annual rate of 760,000. The current pace is up 6.9 percent from housing starts in May and 24 percent up from June of last year.

Real estate analysts are predicting home building starts to increase to 1 million in 2013 and 1.4 million in 2015, wrote the Goldman Sachs Group Inc. in a report to their clients. In fact, Goldman Sachs raised their rating on the homebuilding industry from neutral to attractive.

“Over the last year a number of risks to the housing market have abated, giving us confidence that rising home prices will drive a 3-7 year up-cycle in the U.S. market,” wrote Goldman Sachs analysts.

Homebuilders who have weathered the recession having accrued little to no debt have the most potential to see huge earnings. Since new home supply will remain scarce throughout 2012 and 2013, contractors who are confident about growing business will be less likely to negotiate prices down; like they’ve had to do for the past couple years.

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