5 States Where Home Prices Are the Slowest to Rebound
Investors in homebuilding stocks and homeowners around the U.S. can exhale with a bit of relief today after America's largest homebuilder, D.R. Horton delivered what is largely considered a fantastic earnings report yesterday.
D.R. Horton's report wasn't expected to be spectacular with the Mortgage Brokers Association's weekly loan origination figures exhibiting weakness since lending rates hit their historic lows in May. Yet, for all intents and purposes, D.R. Horton delivered incredible results. For the quarter, homebuilding revenue rose 40%, net income jumped 39%, and average home sales price rose 15%, demonstrating that it hasn't caved into discounting its homes to drive sales despite slightly higher lending rates.
Yesterday, we looked at one of the reasons why D.R. Horton has benefited from such a rebound in the housing market: It's in all the right places. Developing in states that were hit the hardest and near large metros has been a formula for success in recent quarters for D.R. Horton and other builders within the sector.
However, there are also certain states that aren't performing very well in terms of housing price increases and could stand as serious drags to the performance of certain homebuilders. Once again, using Barchart's Housing Price Index, I propose to examine the five states with the weakest housing price growth, identify some trends, if any, for these regions, and note which homebuilders may underperform their peers due to exposure to these regions.
Here are the five states where home prices are the slowest to rebound:
Average Year-Over-Year Home Price Increase
I believe there are multiple factors at work here that are constraining housing prices in the above states. With the exception of Florida, Georgia, and Michigan, not a single state east of the Mississippi River has a growth rate in excess of 2.4%, which is dismal compared to the remainder of the U.S.
One big reason for this weak growth is that job growth in the Ohio River Valley and northeastern U.S. has been dreadful. Let's not overstate that job growth is in any way spectacular throughout the remainder of the U.S., but plenty of large metros in the Ohio River Valley and South that were smacked during the recession have yet to see manufacturing sector jobs return. With little job growth currently in the works, homebuilders and investors have generally shied away from these regions.
Another possible reason for weak housing price growth with regard to Mississippi, Alabama, and Ohio, is that these three states are among the lowest in terms of annual household income. Ohio is 39th, Alabama 43rd, Mississippi dead last when it comes to household annual income over the past three years according to the U.S. Census Bureau, which effectively keeps businesses and investors from dabbling in these regions.
Which homebuilders may struggle?
One homebuilder that's been on thin ice for some time and may continue to struggle is Beazer Homes . Although Beazer does operate in some of the nation's quickest-growing states like California and Arizona, it's predominantly an East Coast homebuilder and has much of the Southeast and Chesapeake Bay region covered. With the exception of Florida and Georgia, these East Coast states are harboring home price growth rates of just 1%-2%, which isn't going to provide much help to Beazer's already subpar homebuilding margins. As icing on the cake, Beazer hasn't turned an annual profit since 2006 and has generated negative free cash flow in each of the past two years. It may be a homebuilder you'll want to avoid.
Higher-end homebuilder Toll Brothers could be another candidate to struggle. To begin with, despite having some communities in high-growth areas like the Southwest and in Florida, it also has almost the entire East Coast blanketed (including Connecticut), which isn't good news based on the housing price growth figures we've looked at above. Toll Brothers I feel could be in a particularly disadvantageous position because, as a higher-end home builder, it will feel any increase in interest rates more so than its peers. A quarter-point increase in a 30-year mortgage hurts a heck of a lot more when you're buying $500,000 worth of home than when you're purchasing it for $200,000. With nearly $1.6 billion in net debt, there's definitely a lot that could go wrong here for Toll if the housing market doesn't cooperate.
Lastly, I'd be concerned if I were invested in small-cap homebuilder M/I Homes knowing just how weak growth has been in the Ohio River Valley and Chesapeake Bay Region. With no presence west of Texas and no high-growth housing states beyond Florida, M/I Homes is going to need to see a big rebound in jobs growth in its serviced regions. Otherwise, it'll have a hard time maintaining any sort of pricing power. In M/I Homes' most recent quarterly report, it did deliver an average home sales price increase of 7%, but compared to the 12% to 15% increases that we've witnessed in the remainder of the sector, it points to M/I's potential to underperform given its exposure to slow-growth regions.
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The article 5 States Where Home Prices Are the Slowest to Rebound originally appeared on Fool.com.Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool has no position in any of the stocks mentioned, either. 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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