Investors seem to be loving homebuilders these days.
Shares of Lennar (LEN) hit a five-year high last week. Toll Brothers (TOL) followed through fresh five-year peak on Monday.
It's easy to get excited about the bellwethers. Home prices have finally started to inch higher. Developers are growing their bottom lines and their cancellation rates are shrinking. There may be a few laggards out there, but the trend is generally upbeat.
Analysts see Lennar and Toll Brothers growing their revenue 26% and 23% respectively this year, and are looking for those rates to accelerate in the next fiscal year.
However, hold your applause: It may be too early to start calling this an actual housing recovery.
Yes, homebuilder stocks have bounced back. But there are plenty of favorable tailwinds that can whirl back around and become battering headwinds pretty soon.
Why The Housing Bounce Won't Last
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Yes, homebuilder stocks have bounced back. But there are plenty of favorable tailwinds that can whirl back around and become headwinds pretty soon.
Borrowing costs are still hovering near historic lows. In a financial disclosure filing last week it was revealed that Ben Bernanke -- yes, that Bernanke -- refinanced his home last year. If even the Fed chairman thinks that the time is right to lock in low rates, it's advice worth heeding.
Low interest rates are keeping home prices buoyant, obviously. If mortgage rates move higher there's less bang for every home-buying buck. What do you think will happen to home prices when interest rates move higher? You know the answer. Investors in homebuilders apparently do not.
One of the things helping inflate the domestic housing market is the emergence of international opportunists.
The National Association of Realtors estimates that overseas buyers spent $82.5 billion on U.S. properties during the 12 months ending in March -- accounting for nearly 9% of all home purchases. The percentage is even greater in some of the states hit hardest during the meltdown, with more than a quarter of all homes being sold in Florida going to international purchasers.
Whether we're talking about folks approaching the U.S. as a safe haven or investors sensing that real estate prices have fallen too hard, outsiders are storming into the market. Foreign sales spiked 24% over the prior 12 month-period.
The problem with this strategy is that these are also the same people who will exacerbate the problem by selling quickly if prices start to fall again.
Ahh, politics. If you've seen the Barack Obama ads arguing that Mitt Romney would raise taxes on the middle class by up to $2,000 -- shocking, given the Republican's candidate emphasis on cutting tax rates across the board -- it's time to brush up on the tax breaks that may dry up in exchange for lowering corporate and individual income tax rates.
The nonpartisan Tax Policy Center points to the likelihood of the elimination or at least partial elimination of common itemized return deductions including mortgage interest, health insurance, and charitable contributions if Romney wins the White House.
Keep in mind that the Romney camp has not gone public with the exact breaks that would be scaled back, but it's easy to see what would happen to new and existing home sales if the mortgages being taken out to finance them no longer had the same after-tax appeal.
Taking a look at the other side of the partisan minefield, what do you think will happen to home prices if tax rates go up on citizens earning more than $250,000 a year? The luxury home market would naturally take a hit as potential buyers have less money for their new digs. But what about the cheaper second or third vacation properties that they may not be able to buy?
Home prices across various price brackets would take a hit if take-home pay shrinks for well-heeled potential buyers. This is why the real estate bounce may come to an end in 2013 regardless of who is in the White House.
The popularity of asset-sharing services for big-ticket items is booming. Why buy a car or a vacation property when you can simply rent one when you need it? Even a private jet -- a luxury historically reserved for the very rich -- is now within reach of mere multimillionaires through corporate jet-sharing services.
That mindset is also permeating into actual home ownership. Owning a house is no longer the American dream.
Several reports indicate that owning is now cheaper than renting in most major cities given the historic low mortgage rates. Why aren't folks buying? Well, they would rather have the certainty of renting than the uncertainty of buying a home that may decline in value again.
With the images of foreclosures and underwater mortgages fresh in their minds, consumers won't be as speculative or naive this time around.