Wednesday, April 23, 2014

Lawler on Meritage Homes: Net Home Orders Down despite Higher Community Count, “Less Pricing Power” Suggests Relatively Flat Home Prices for Rest of Year

by Bill McBride on 4/23/2014 01:36:00 PM

From housing economist Tom Lawler:

Meritage Homes, the ninth largest US home builder, reported that net home orders in the quarter ended March 31, 2014 totaled 1,525, down 1.4% from the comparable quarter of 2013. Orders were down despite a 16% YOY increase in the company’s average community count. The company’s sales cancellation rate, expressed as a % of gross orders, was 13% last quarter, up from 11% a year ago. Home closings totaled 1,109 last quarter, up 5.4% from the comparable quarter of 2013, at an average sales price of $366,000, up 16.4% from a year ago. The company’s order backlog at the end of March was 2,269, up 15.4% from last March, at an average order price of $368,400, up 8.3% from last March.

Meritage said that it owned or controlled 25,807 lots at the end of March, up 22.7% from last March and up about 50% from two years earlier.

Here are some excerpts from the company’s press release.

"The high-pitched pace of sales in our western region has slowed in recent quarters after experiencing very robust demand and significant increases in home prices since 2012," he explained. "Demand in Arizona has softened over the last several months and home prices there have moderated. On the other hand, demand in California and Colorado remains strong, though not as intense as a year ago. We continue to focus on maximizing profitability at a more normalized sales pace."

He concluded, "We remain committed to our forecast of approximately 210-220 active communities by year-end 2014 (versus 188 at year-end 2013). Based on the trends in sales pace and prices that we've experienced so far this year, we are projecting that our 2014 home closing gross margin may be relatively flat compared to 2013, due to less pricing power and higher land costs. With that in mind, we believe we will still achieve significant earnings growth in 2014, and that future years' earnings growth will be driven mainly by community count growth and operating leverage as we expand and grow our top line while managing our costs."
Meritage Home PricesClick on graph for larger image in graph gallery.

CR Note: This graph from Tom Lawler shows Meritage's net home order sales price.    Part of the reason for the slight price decline is because of fewer sales in the western region (more expensive). 

Lawler: In the quarter ended March 31, 2013, Meritage’s net orders per active community were up almost 27% from the comparable quarter of 2012. In the quarter ended March 31, 2014, net orders per active community were down about 15% from the comparable quarter of 2013, with the biggest decline coming in the West (down 32.8%).

AIA: Architecture Billings Index indicated contraction in March

by Bill McBride on 4/23/2014 11:23:00 AM

Note: This index is a leading indicator primarily for new Commercial Real Estate (CRE) investment.

From AIA: Architecture Billings Index Mired in Slowdown

Following a modest two-month recovery in the level of demand for design services, the Architecture Billings Index (ABI) again turned negative last month. As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lead time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the March ABI score was 48.8, down sharply from a mark of 50.7 in February. This score reflects a decrease in design services (any score above 50 indicates an increase in billings). The new projects inquiry index was 57.9, up from the reading of 56.8 the previous month.

“This protracted softening in demand for design services is a bit of a surprise given the overall strength of the market the last year and a half,” said AIA Chief Economist Kermit Baker, Hon. AIA, PhD. “Hopefully, some of this can be attributed to severe weather conditions over this past winter. We will have a better sense if there is a reason for more serious concern over the next couple of months.”

Regional averages: South (52.8),West (50.7), Northeast (46.8), Midwest (46.6) [three month average]
emphasis added
AIA Architecture Billing Index Click on graph for larger image.

This graph shows the Architecture Billings Index since 1996. The index was at 48.8 in March, down from 50.7 in February. Anything below 50 indicates contraction in demand for architects' services.  This index has indicated expansion during 16 of the last 20 months.

Note: This includes commercial and industrial facilities like hotels and office buildings, multi-family residential, as well as schools, hospitals and other institutions.

According to the AIA, there is an "approximate nine to twelve month lag time between architecture billings and construction spending" on non-residential construction.  Even when positive, this index was not as strong as during the '90s - or during the bubble years of 2004 through 2006 - because the vacancy rates are still high for many CRE sectors.  However, the readings over the last year and a half suggest some increase in CRE investment in 2014.

New Home Sales decline to 384,000 Annual Rate in March

by Bill McBride on 4/23/2014 10:00:00 AM

The Census Bureau reports New Home Sales in March were at a seasonally adjusted annual rate (SAAR) of 384 thousand.

February sales were revised up from 440 thousand to 449 thousand, and January sales were revised up from 455 thousand to 470 thousand.  

The first graph shows New Home Sales vs. recessions since 1963. The dashed line is the current sales rate.

Sales of new single-family houses in March 2014 were at a seasonally adjusted annual rate of 384,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 14.5 percent below the revised February rate of 449,000 and is 13.3 percent below the March 2013 estimate of 443,000.
New Home SalesClick on graph for larger image in graph gallery.


Even with the increase in sales over the last two years, new home sales are still near the bottom for previous recessions.

The second graph shows New Home Months of Supply.

The months of supply increased in March to 6.0 months from 5.0 months in February.

The all time record was 12.1 months of supply in January 2009.

New Home Sales, Months of Supply This is now in the normal range (less than 6 months supply is normal).
"The seasonally adjusted estimate of new houses for sale at the end of March was 193,000. This represents a supply of 6.0 months at the current sales rate."
On inventory, according to the Census Bureau:
"A house is considered for sale when a permit to build has been issued in permit-issuing places or work has begun on the footings or foundation in nonpermit areas and a sales contract has not been signed nor a deposit accepted."
Starting in 1973 the Census Bureau broke this down into three categories: Not Started, Under Construction, and Completed.

New Home Sales, InventoryThis graph shows the three categories of inventory starting in 1973.

The inventory of completed homes for sale is still low, but moving up. The combined total of completed and under construction is also very low.

The last graph shows sales NSA (monthly sales, not seasonally adjusted annual rate).

In March 2014 (red column), 36 thousand new homes were sold (NSA). Last year 41 thousand homes were also sold in March. The high for March was 127 thousand in 2005, and the low for March was 28 thousand in 2011.

New Home Sales, NSA

This was well below expectations of 455,000 sales in March.

I'll have more later today . 

MBA: Mortgage Applications Decrease in Latest MBA Weekly Survey

by Bill McBride on 4/23/2014 07:01:00 AM

From the MBA: Mortgage Applications Decrease in Latest MBA Weekly Survey

Mortgage applications decreased 3.3 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending April 18, 2014. ...

The Refinance Index decreased 4 percent from the previous week. The seasonally adjusted Purchase Index decreased 3 percent from one week earlier. ...

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) increased to 4.49 percent from 4.47 percent, with points increasing to 0.50 from 0.32 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.
emphasis added
Mortgage Refinance Index Click on graph for larger image.


The first graph shows the refinance index.

The refinance index is down 74% from the levels in May 2013 (almost one year ago).

With the mortgage rate increases, refinance activity will be significantly lower in 2014 than in 2013.


Mortgage Purchase Index The second graph shows the MBA mortgage purchase index.  

The 4-week average of the purchase index is now down about 18% from a year ago.

The purchase index is probably understating purchase activity because small lenders tend to focus on purchases, and those small lenders are underrepresented in the purchase index.

Tuesday, April 22, 2014

Wednesday: New Home Sales

by Bill McBride on 4/22/2014 08:35:00 PM

From Catherine Rampell at the WaPo: Americans think owning a home is better for them than it is

Over the past century, housing prices have grown at a compound annual rate of just 0.3 percent once one adjusts for inflation, according to my calculations using Shiller’s historical housing data. Over the same period, the Standard & Poor’s 500-stock index has had comparable annual returns of about 6.5 percent.

Yet Americans still think it’s financially savvy to dump all their savings into a single, large, highly illiquid asset.
First, as I've pointed out several times, Shiller used several estimates for changes in house prices. As an example, for the decade prior to 1987 (when the Case-Shiller index started), Shiller used the FHFA index.  However this index was for a small percentage of loans. If he had used CoreLogic instead, the real return over the period Rampell analyzed would have been closer to 1.5% (much higher than 0.3%).

Second, Rampell assumes the buyer paid cash - a much better model would have assumed 10% down, and would have had the buyer refinance every few years as mortgage rates declined. This also means there would be far less invested in the S&P500 than Rampell assumed.

Third, a young person might be happy with a $400 apartment in 1982, but I doubt they'd want to live in the equivalent apartment for 30+ years (marriage, raise kids, etc.).  The model should assume a move-up buyer and renter at certain points.

I'm confident a more complicated  and thorough model would produce the opposite result over the period in question.

Wednesday:
• At 7:00 AM ET, the Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

• At 10:00 AM, the New Home Sales report for March from the Census Bureau. The consensus is for an in increase in sales to 455 thousand Seasonally Adjusted Annual Rate (SAAR) in March from 440 thousand in February

• During the day, the AIA's Architecture Billings Index for March (a leading indicator for commercial real estate).

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