Growing demand and an improving economy are undoubtedly building homebuilders’ hopes. Yet land and labor shortages, burdensome mortgage underwriting standards, cutthroat competition and cost inflation amid moderating home price increases could hold back the recovery in 2016.
It would be prudent to take a closer look at these dampeners before investing in this space. Below, we discuss the impact that these can have on the sector in the coming months and years.
Labor/Land Shortages
Several years of production deficits during the housing downturn resulted in a limited supply of both rental and new homes in the country. At present, a shortage of buildable lots, skilled labor and available capital for smaller builders are limiting home production, thereby lowering the inventory of homes, both new and existing ones.
The labor market has tightened with limited availability of labor arresting the rapid growth in housing production. Also, limited capital for land and land development has left entitled lands in short supply. Moreover, the regulatory environment for mortgages remains challenging.
New home inventory for sale was 226,000 units at the end of October, a 5.5-month supply at the current sales pace, down from a 6.0 month supply in September. Total housing inventory of existing homes was 4.5% lower at the end of October than a year ago, per data released by the National Association of Realtors in October.
Rising Labor, Land and Material Costs
Rising land and labor costs are threatening margins as they limit homebuilders’ pricing power. Labor shortages are resulting in higher wages while land prices are inflating due to limited availability. There could be more inflation going forward. This is eating into homebuilders’ margins considering that home price increases are moderating.
Rising construction, labor and material costs have hurt gross margins of the likes of Lennar Corporation (LEN - Analyst Report), KB Home (KBH - Analyst Report) and D.R. Horton, Inc. (DHI - Analyst Report) in the past few quarters.
Slowing Sales Trends in Texas
The economy of Texas is dependent on the oil complex. Lower oil prices are hurting the region’s overall economy and affecting home sales. Sales trends have particularly slowed down in Houston in the wake of the oil slide.
Pulte Group, Inc. (PHM - Analyst Report) is witnessing declining order trends in Texas in 2015 which accounts for around 15% of its homebuilding revenues. Pulte’s orders declined 5%, 13% and 5% in Texas in the first, second and third quarters of 2015, respectively. Tight labor resources and community opening delays, partly caused by unfavorable weather in the first half of the year, hurt Pulte’s order trends in Texas in the third quarter.
Lennar is also seeing declining order trends in the Houston region in 2015, mainly across higher price points. Houston accounts for around 9% of Lennar’s homebuilding revenues. KB Home also witnessed some delays in community openings in Houston in the last quarter due to severe weather.
A smaller homebuilder, Meritage Homes Corp. (MTH - Snapshot Report), saw slowing demand trends in Houston compared to last year. However, sales prices in the region have remained stable according to Lennar and Meritage Homes.
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