Low mortgage rates and strong demand benefitting US home builders

Low mortgage rates and strong demand should create a positive outlook for home builders in the United States but a serious labour shortage could hold them back. During the 2009 recession nearly a quarter of construction workers lost their jobs as the housing market collapsed and there is evidence that a number of labourers are not returning, leaving remaining construction workers overstretched, says an analysis report from Hermes Investment Management. It explains that this lack of qualified labour causes two fundamental problems for the industry. First, the completion rate struggles to keep pace with demand, which is on the rise in the US, and secondly margins shrink as workers command much higher pay. However, one of the most fundamental challenges facing US home builders is a reduction in first time buyer demand. The report suggests that mounting student debts, lagging wage inflation, scarce financing and lifestyle preferences weigh on the desire to buy a first home. ‘While demand for housing is generally rising in the US, the lack of younger buyers could permanently or semi-permanently remove a key driver of demand,’ said analyst Andrey Kuznetsov. He pointed out that 49% of 25 year olds lived with their parents in 2013, some 20% higher than in 1999, dramatically reducing the aggregate number of households even without adding those choosing or having to rent. ‘While overall demand still outstrips supply, this gradual cultural shift is removing some pipeline demand,’ added Kuznetsov. “The report also explains that housing market trends specific to certain US states can also work against home builders. Demand for housing in certain parts of Texas, such as Houston, started deteriorating after the oil price dramatically declined in late 2014 and continued to fall throughout the last year. This initially affected more expensive properties, but is now also impacting lower priced homes,” reported by propertywire. In California, where international buyers are usually a significant presence in the market, the stronger US dollar and weakness in buyers’ home economies are deterrents. Additionally, the volatility in equity markets could slow the demand from employees of the historically buoyant tech sector in the state. Home builders with above average exposure to these markets are increasingly at risk. However, it adds that short housing supply and low mortgage rates, the average 30 year loan charges 3.65% interest, suggest that fundamentals for the sector are strong. ‘However, in an environment where build times are lengthening, margins are under pressure, demand from first time buyers is declining and certain regional risks are increasing, we think there is more risk to the downside. Furthermore, the sector is trading at a relatively expensive level compared to others, supporting our negative view,’ said Kuznetsov.