Home builders may have escaped the damaging market
The current status of the U.S. real estate market has been less than ideal for many, with the quiet exception from home buyers. Since the beginning of 2006, the market has done a 180-degree turn from its record-breaking positive sales and home price increase to record-breaking sales declines and home price decreases.
Since the start of the declining (or correcting) market, there has been much speculation about the projected end result. While prices and sales are expected to decline and slow for a while, one of the most worrying concerns had been about the future of home builders and developers.
Michael Corckery explains how home builders may now be able to rest easy in his article, “Whistling Past Housing's Graveyard?” printed in the October 9, 2006 edition of The Wall Street Journal.
“The Dow Jones Wilshire U.S. Home Construction Index of home-builder stocks has increased about 15% since July 18 -- even as each passing week shows the nation's housing statistics heading down. While the index is still down for the year, that recent rise has outpaced broader market indexes and set off a debate among investors about whether the slowdown might end sooner for the home builders than many expect.”
One viable reason for the increase in stocks is due to the recent mortgage rate decline. The Federal Reserve had raised rates 17 consecutive times until it was close to 7 percent. Since then (end of July) rates have continued to slowly decline and are now around 6.3 percent. The lower the rate equates to more homes being purchased, which leads to more homes needed to be constructed. But will this rate decrease be enough to save the housing market and home builders?
“According to the National Association of Realtors, sales of existing homes were down 12.6% in August from a year earlier, and the median price of homes sold dropped 1.7% over that period -- the first year-to-year price decline in 11 years. Sales of new homes were down 17.4% in August from a year ago, according to the Census Bureau.”
Since home builders are directly linked with mortgages rates and home sales, it is remarkable that their stocks are actually increasing, when it would seem likely that just the opposite would take effect.
Newspaper headlines have also suggested and warned of a disaster for home builders, but home builder stocks apparently can not read.
“For instance, shares of Lennar Corp., which reported on Sept. 8 that it was reducing third-quarter earnings estimates because of the continued housing slump, have risen roughly 6% since then.”
“‘If the sector stops going down with bad news, it may imply that it has found a bottom,’ says John Buckingham, chief executive of Al Frank Asset Management, which has $800 million under management and whose investment newsletter, the Prudent Speculator, has recommended more builder shares in recent months.”
Keep in mind that home builder stocks have not yet begun to pay off although the potential for an increase is high.
If home builder stocks grow, their industry will be saved, which can lead to a revival of the overall housing market.
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