On the housing market and homebuilder front, mortgage rates for 30-year fixed-rate conforming loans stayed at 4.88% this week, while rates for a 15-year fixed-rate conforming loan fell one basis point to 4.32%. The data comes from Bankrate.com which has been tracking mortgage interest rates for 25 years. Rates below 5% have occurred just five times since Bankrate started keeping records, and all five times have been in the past five weeks.
Three-quarters of mortgage borrowers are looking to re-finance their existing homes. Re-financers are taking the opportunity to consolidate second mortgages or other debt at the historically low rates. The number of re-financings doesn’t augur well for home builders like Toll Brothers, Inc. (NYSE: TOL), KB Home (NYSE: KBH), PulteGroup, Inc. (NYSE: PHM), and
Lennar Corp. (NYSE: LEN), just to name a few.
New construction fell in May to a seasonally adjusted annual rate of 593,000, down 10% from the revised April rate of 659,000. Applications for new building permits, an indicator of future activity, also fell to an annual rate of 574,000, down nearly 6%. The expiration of the federal housing tax credit gets a lot of the blame for the construction drop.
To punctuate the dreary news, Toll Brothers provided an update on its outlook for the rest of the quarter, something it rarely does. The company, which is the largest builder of luxury homes in the US, said that since it reported earnings on May 26th, deposits are down 20% compared with last year on a per-community basis. For the first six weeks of the quarter, Toll Brothers is “slightly ahead” of last year’s signed contract number per community, but the number of communities is 21% lower than last year.
Toll Brothers signed 4.32 contracts per community in its 2010 second quarter, ended April 30th, half the 20-year average of 8.23 contracts. Third quarter contract signings are lower, historically running at 6.21 contracts per community. Toll Brothers expects third quarter signings in the current quarter to be lower than the second quarter total.
The company said that buying decisions “have been driven more by consumer confidence than by the tax credit.” In context, what Toll Brothers means is lack of confidence caused by the shaky economic news from Europe and “worries about the oil spill in the Gulf of Mexico and its effects on the economy and the environment.”
In the face of this all this gloom and doom, though, Toll Brothers remains optimistic. It believes that there is pent-up demand for new homes and that historically low interest rates, high affordability, and positive signs of overall economic growth will turn things around once unemployment numbers improve.
Maybe Toll Brothers is right, and once consumer confidence returns new home sales will follow. But renewed confidence demands patience, and home builders’ shareholders might not be willing to wait.
Perhaps that’s why Toll Brothers is partly blaming the Gulf oil spill for the lack of confidence in an economic recovery. The company might want to file a claim for a piece of the $20 billion fund that BP will establish. Stranger things have happened.
Home builders’ shares traded mostly flat yesterday, as did the SPDR S&P Homebuilders ETF (NYSE: XHB).
