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Market Updates

Market News Update: Pleasantly Surprising Sales Activity Trumps Industry Headwinds as Housing Recovery Strengthens

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docFrom Jason Payne, Market News Analyst …

Although the U.S. housing industry continues to face some challenges, another week of pleasant surprises from our industry’s news cycle bolsters Mogul’s view that this ongoing recovery in residential real estate is here to stay.

Think of the U.S. housing industry as a once-critical patient who seemed all but lost in the economic E.R.:

Until recently, that woeful real estate patient was clinging to Ben Bernanke’s life support like a five dollar toupee clings to Donald Trump’s scalp on a windy day.  But after much economic care (and more than a few brushes with death), the patient is now regaining many of its normal motor skills …

... And those of us who have been rooting for the housing market’s long-term health prospects now find ourselves in a delightfully refreshing season of recovery.  Our fading memories of nonstop bad news continue to be replaced with a regular flow of pleasantly surprising developments.

In fact, Dr. Yellen has even wondered aloud if that obtrusive bedpan might no longer be necessary!

But rather than speculating about Dr. Yellen’s future prescriptions (or lack thereof), let’s give due appreciation to the latest sampling of good news that has arrived at our industry’s doorstep during the last seven days.

Of course, there will be plenty of time in later lessons to continue our macroeconomic prognostications about the precarious intersection of politics, money supply and housing fundamentals.  As always, I promise to delve into those controversial arenas as needed – but only when they are truly the most important developments for a residential real estate investor to consider …

And this week’s news flow simply calls for a different breed of analysis.

Yes, it seems most appropriate to begin the analytical portion of this week’s Market News Update with an encouraging investigation of the Commerce Department’s latest data about new home sales …

chartNew Home Sales Increased to a Five-Year High in January

Purchases of new U.S. homes unexpectedly climbed in January to the highest level in more than five years, showing underlying strength in the industry even in the midst of unusually harsh weather.

Specifically, we note that January’s sales activity increased 9.6% to an annualized rate of 468,000 homes, which exceeded even the highest estimate of 82 economists surveyed by Bloomberg (highest estimate = 442,000 homes; median estimate = 400,000 homes).  This robust performance also represented the strongest data since July 2008.

Demand improved in three of the four major U.S. regions, led to the upside by the Northeast region, where new home sales surged 73.7% – the largest increase since July 2012.  Meanwhile, sales improved 11.0% in the West region and 10.4% in the South.  Only the Midwest saw a decline in sales activity, with demand falling 17.2% in that area amid the coldest January since 2011.

Home Depot & Lowe’s Exceed Sales Forecasts

On a similar note, recent fourth quarter earnings reports from Home Depot and Lowe’s further confirm that this housing rebound ain’t disappearing anytime soon. 

(Our proverbial housing patient may not be walking unassisted out of the hospital door quite yet, but his respiratory system is returning to health at a quicker-than-anticipated pace!)

Both Home Depot Inc. (NYSE-HD: $82.87) and Lowe’s (NYSE-LOW: $50.63) topped their initial sales forecasts for last year, benefiting from consumers’ eagerness to invest in their homes. The results helped alleviate concern that a slowdown in the housing market’s rebound and sluggish job growth would suppress demand for appliances, flooring and paint.

Home Depot, the industry’s largest home-improvement retailer, exceeded both internal and external sales forecasts for its Q4 2013 and full-year 2013 performance, marking six straight years of meeting or beating projections. Sales increased 5.4% to $78.8 billion last year, more than twice the 2.0% growth rate initially forecasted by the company’s management.

Home Depot also raised its quarterly dividend by a whopping 21.0%!  My old colleagues in the stock market must have had a field day with that announcement!

And although Lowe’s results were consistent with internal and external estimates, we note that the company now expects to enjoy a 5.0% improvement in annual sales growth during 2014 – which would represent the company’s second-highest increase of the past seven years.

suspectsIndustry Growth Still Hampered by the Usual Suspects

Of course, the housing industry still faces a few other challenges, in addition to the weather, and our proverbial patient must still “take it easy” in various regards.

To wit, January’s limited supply of homes declined to the lowest level since June; there were only 184,000 new houses on the market at the end of January.

And still-tight credit conditions combine with rising borrowing costs to remind investors daily that the U.S. housing market is not out of the woods quite yet.  Thirty-year fixed mortgage rates began 2013 at 3.38% and by last August had risen to 4.57%; in the latest Freddie Mac survey, they averaged 4.37%.

Still, the positive momentum from recent days only adds to growing optimism amongst economists that the housing market is regaining its footing.  This recovery ain’t disappearing any time soon.

Jason Payne’s next Market News Update is scheduled for Wednesday, March 19th.

 

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