Homebuilders climb even as housing outlook remains cloudy
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Homebuilders climb even as housing outlook remains cloudy

Homebuilders climb even as housing outlook remains cloudy

In this March 18, 2020 photo, Construction continues at a housing plan in Zelienople, Pa., The housing market has stalled, but homebuilder stocks are up sharply amid signs that sales are starting to improve. Still, the outlook for a housing market recovery remains cloudy, given uncertainty over the pandemic's impact. (AP Photo/Keith Srakocic)

LOS ANGELES (AP) — The U.S. economy and housing market had set homebuilders up for a strong 2020.

That was before the efforts to stem the spread of the coronavirus pandemic knocked the economy into a skid, dimmed consumer confidence and left a record number of Americans unemployed.

The housing market stalled in March as many would-be buyers held off on purchases. Sales of newly built and previously occupied U.S. homes fell sharply. Home construction slowed. The April data out so far shows the housing slowdown continued last month.

And yet, you wouldn’t know it by looking at homebuilder stocks. While shares in most of the builders are still in the red for the year, the majority of them have notched big gains so far this month that eclipse those of the S&P 500 by a wide margin. An S&P index of homebuilders is up 11.8% in May, versus a 1.2% gain for the broad-market S&P 500 index.

In recent weeks, as builders reported quarterly results, many have said business was going great until mid-March, when the coronavirus shutdowns began. But several also noted that business started to improve by mid-April and has continued to do so into May, said Carl Reichardt, a homebuilding analyst with BTIG.

“The critical question is how much of the improvement we’ve seen was simply the release of pent-up demand from the period of time of four weeks in mid-March to mid-April when business was frozen,” Reichardt said. “It’s hard to answer that question right now.”

The builders that have tended to weather the coronavirus slowdown better have been those, such as D.R. Horton and Lennar, that sell lower-priced homes for the entry level segment of the market, especially in the Southeast, and those that build ready-to-sell homes, rather than the built-to-order model, Reichardt said.

The housing market appeared set to extend a solid run-up in sales that began last fall as mortgage rates headed lower. The inventory of U.S. homes for sale had dwindled to the lowest level in more than a decade and a solid job market and low unemployment rate combined with more millennials entering their 30s led economists to forecast strong demand for housing this year.

Homebuilders were in prime position to capitalize on these trends heading into the spring homebuying season, aided by another pullback in mortgage rates. The average rate on a 30-year, fixed-rate mortgage has gradually fallen from an already low 3.72% the first week of January to 3.24% this week.

Sales of new homes jumped 7.5% in January then fell 4.6% the next month. By March, however, the economic fallout from the coronavirus pandemic knocked the housing market activity into a skid.

New homes sales sank 15.4% in March as mounting job losses and mandates to shelter in place in many cities put off many would-be buyers. April figures are out next week, and analysts estimate sales skidded 15.5% last month. Housing starts, another barometer for housing and builders, plunged 22.3% in March and cratered 30.2% last month, the lowest level in five years.

The National Association of Realtors said Thursday that sales of previously occupied U.S. homes, a far larger slice of the market than newly built homes, slid to a seasonally adjusted annual rate of 4.33 million units in April, the slowest pace since September 2011.

A forecast issued earlier this month by Zillow economists calls for U.S. home sales to decline as much as 60% this spring and take through the end of the year to recover. Another forecast, this one from Haus, a lender that co-invests with buyers as an alternative to traditional mortgages, projects the number of completed new homes largely declining well into 2021.

While states have begun to relax stay-at-home mandates and are clearing the way for businesses that were shut down to reopen, some economists predict U.S. economic growth could take years to fully bounce back. And many expect the unemployment rate to come down slowly over the next couple of years.

“The key, of course, is employment, meaning housing’s big rebound year is looking more as if it occurs in 2021,” Steven Blitz, chief U.S. economist at TS Lombard, wrote in a report this week. “Beyond that, and unlike the expansion just ended, housing will be back as a critical driver of growth.”

Still, even if a sluggish economic and job market recovery ends up delaying some would-be buyers from purchasing a home, the housing market remains largely favorable for big builders.

In addition to low mortgage rates and rising home prices, builders benefit from the chronically thin inventory of homes for sale nationwide, a trend that’s intensified during the pandemic as the pace of new construction slowed and as homebound sellers pulled their homes off the market. The number of previously occupied homes for sale nationally fell to a record-low last month, which drove the median sales price up over 7%.

Copyright 2020 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed without permission.

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