Another Day, Another Dose of Good News for Housing


Earlier this week, we were treated to yet another positive sign for housing as pending home sales rose 1.5% in March. That positive momentum continued after an index of home prices revealed the largest year-over-year growth in more than six years. The index was up 9.3% over the same period last year after just rising a seasonally adjusted 1.2% in February. This is all on top of data earlier this month from the Department of Commerce that saw construction of new homes jump 47% over the same period last year. That made this year's growth the largest year-over-year jump since 1992. Overall, the housing market appears to be doing quite well.

The market's recent success is driven by three overriding contributors: Continued low interest rates, increasing demand, and constrained inventory -- none of which appears to be showing any signs of easing. Instead, increased demand and constrained inventory are fueling growth throughout the housing industry.

This has trickled all the way down to the performance of forestry companies. Timber REIT Plum Creek Timber saw its first-quarter earnings nearly double. Its business performance improved across the board as its timber segment saw revenue grow 9.7%, while its manufacturing segment saw a 13% increase and finally its real estate business improved revenue by 22%. Looking ahead, the company expects higher demand for both lumber and structural panels, which will positively impact prices for the foreseeable future. To take advantage of this, last month it restarted operations at one of its sawmills, which had been idle since 2009.

Weyerhaeuser is also enjoying this strong momentum as its profit more than tripled and its wood products business saw its strongest quarterly earnings since 2005. The only subpar news came from its homebuilding business, which didn't fare as well. However, it still experienced solid traffic and a steady increase in the average selling price of its homes.

Rising home prices have added a nice boost to the bottom lines at most other homebuilders. For example, PulteGroup saw its average selling price jump 10% last quarter to $287,000. This helped boost revenue by 35% while margins improved to 22.9%. However, while this bottom-line increase from rising home prices is enticing builders to construct more homes, it's not yet keeping pace with the market.

Some buyers are now experiencing a sense of urgency, which might cause a pause at some point. Rapidly increasing home prices might even scare some buyers away and force them to continue renting. Apartment companies like AvalonBay Communities and Brookfield Property Partners' (NYSE: BPY) Fairfield Residential are already benefiting from higher occupancy rates, meaning rising home prices could lead to even higher rents.

Because of the overall unease of many to get back into the housing market, it has already been a tight rental market. The big driving force behind new home construction last month was a 27% increase in starts for buildings with more than five units. This has also been driving Brookfield to build up its apartment holdings as it now controls more than 15,600 multifamily units at Fairfield and recently acquired another company and its 5,000 apartments. AvalonBay, too, has been aggressive in acquiring apartments and earlier this year the company closed its $6.5 billion deal for 40% of Archstone's assets from Lehman Brothers. These two see lower vacancies leading to higher rents and better returns.

That just means that there will be a lot more pent-up demand as renters tire of renting and decide that it's time to buy. Overall, home prices still have a long way to go to hit the prior peak as the housing market still remains 29% below its 2006 peak. So while we are seeing more of a sellers' market in several areas across the country, it's not going to bust anytime soon. Instead, we'll continue to see an increasing number of buyers using low interest rates to chase after tight housing supply. It might be a bumpy recovery, but it's a recovery nonetheless.

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Fool contributor Matt DiLallo owns shares of Brookfield Property Partners. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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