REALITY CHECK: US HOME BUILDERS SAY MARKET REMAINS ROBUST
--Higher Mortgage Rates Offset By Pent Up Demand From Consumers --Home Prices Escalate As Building Costs Rise and Margins Improve --Heatwave Prompts Only Sporadic Work Slowdowns
By Gary Rosenberger
NEW YORK (MktNews) - U.S. home builders say July orders were robust as consumers brushed off escalating mortgage rates, price increases and staggeringly hot weather to go house-hunting.
Major builders are reporting modest year-to-year sales gains in July, but note they had to beat some of the toughest comparisons they faced all year.
They add that the price of new homes is rising significantly -- prompted in part by homebuyers' desire and ability to pay for bigger homes with added options in better locations.
They also note that the cost of building materials, land and labor is rising but are able to pass on those costs, plus some, to portfolio-rich customers.
The major threat, they say, is the potential consequence of higher mortgage rates on future first-time buyers, who are seen as necessary drivers of the upgrade market.
Average 30-year fixed-rate mortgage rates rose to 7.89% the first week in August and were well above 7.50% territory for the entire month of July. In some markets, fixed-rate mortgages breached the 8% ceiling.
"I heard a couple of guys express concern about interest rates, but I haven't heard anyone say they've been hurt by it," said Nick Tennyson, executive vice president of the Durham and Orange County Home Builders Association in North Carolina.
Tennsyon noted that anything negative associated with rising rates is clearly being offset by the positive impact of strong job growth and healthy consumer confidence.
"I'm not hearing any complaints about traffic being down," he said.
He noted that the level of local building permits in his area is bordering on the "absolute peak of home building in the '80s -- only the houses being built today are bigger and more expensive."
Another builder noted that "pent up demand" for housing is so strong in his Minnesota market that the rise in mortgage rates has not been a factor.
"Traffic is good, qualified and strong," said Hans Hagen of Hans Hagen Homes in the Minneapolis suburb of Fridley.
Indeed, local permits data showing sharp increases over like months a year ago indicate that "pent up demand and strong backlogs" continue to fuel construction.
But Hagen worries that eventually higher rates will diminish home-buying at the entry level -- and that will have repercussions in the months ahead.
"Most of the housing here is not for the low and average income buyer -- but eventually the higher rates will effectthe bottom-rung of buyers who buy used homes and permit people to upgrade," he said.
"It's my feeling that in the next two or three months, we're going to have a more significant impact -- but today (higher rates) are no affecting the market," Hagen said.
Another minor weight on the local home building market was the July heatwave. "It slowed production a little -- it's hard to produce at 100 degree temperatures," Hagen said.
The nation's major builders were united in their positive assessments of the domestic housing market -- characterized by bigger and better homes, more of them, and commanding better prices.
"I think there's still a lot of pent up demand in the marketplace," said Rick Beckwitt, president of D.R. Horton, Inc. in Arlington, Texas.
Beckwitt said that higher interest rates have not affected the "overall affordability" of homes and that buyers continue to thrive from a strong economy.
"We're up about 10% (in orders) for July, and we had to beat a very tough comparison of about a 50% increase a year ago," he said.
Not only is the company selling more homes than it did last July but they're more expensive as well, Beckwitt said.
"On a dollar basis, houses are up in the 15% to 20% range -- that's a function of the mix of homes we're selling and overall price increases," he said.
Other executives for major home builders had a similarly felicitous story to tell.
"Fortunately, it seems to be a lot of the same, demand remains good, houses are getting built and traffic patterns are strong," said James Zeumer, a spokesman for Pulte Homes Corp., the nation's biggest builder, based in Bloomfield Hills, Michigan.
Zeumer said consumers have not reacted adversely, as yet, to higher mortgage rates.
"It's hard to say where the magic number is" that would prompt a slowdown -- but the behavior of credit markets are only one part of the housing equation, he said.
"We look at three things: interest rates, employment and consumer confidence -- if people feel good about where the economy is going, they'll buy a house," Zeumer said.
As long as we get two of the three legs, we feel pretty good about what's going on," he said.
The rate rise is also less daunting because there are more financing instruments available to homebuyers, he said. "There's not just a 30-year fixed anymore -- you can get a variable rate and then refinance later when rates come back down," Zeumer said.
Zeumer also reported price increases for homes.
"It's not just the increase in profit margins," he said. "We're also seeing a consumer that's feeling pretty wealthy and putting more options into their homes or buying a more expensive piece of the community, maybe a house by the lake."
He noted, too, that builders are successfully passing along cost increases for raw materials, land and labor.
Zeumer said orders in July were up "only a couple of percent" over a year ago but that was no indication of a slowing since last year's comparisons were considered tough to beat and the company is operating in fewer communities.
He also said there were only "scattered reports" of any heatwave related impact on construction.
"Sales continue to be strong -- and comparisons continue to be positive," said Kelly Fawcett Somoza, a spokeswoman for U.S. Home Corp. in Houston.
"High consumer confidence and employment levels equals strong orders," she said.
"Interest rates, even where they are now, are still at historically low levels and the cost of housing remains affordable," she said.
Editor's Note: Reality Check stories survey sentiment among business people and their trade associations. They are intended to complement and anticipate economic data and to provide a sounding into specific sectors of the U.S. economy. |
