Why Rising Mortgage Rates Worry This Homebuilder Less

From the looks of it, Taylor Morrison Home (NYSE: TMHC  )  can escape from the beating that U.S. homebuilders are taking lately due to headwinds from rising mortgage rates.This Scottsdale, AZ-based homebuilder has exhibited better pricing power with its shift of focus on the move-up buyers who are less concerned about volatile mortgage interest rates than entry-level home buyers.

Additionally, this focus gives the company better leverage in managing its operations, particularly in the velocity of underwriting deals. In some of its communities, it can even intentionally limit or pace construction releases in order to better manage its growing backlog and maximize profitability.

Concentrating on the more affluent move-up buyers enabled the company to raise its U.S. home prices in the 2013 second quarter to an average of $381,000, 17% above the year-earlier level. It did this without losing orders, in contrast with homebuilders like Lennar (NYSE: LEN  ) and KB Home (NYSE: KBH  ) , who generally focus more on entry-level home buyers.

Home orders on a record clip
Taylor Morrison's second-quarter 2013 orders came out as the highest Q2 net sales orders for the last five years, and it had the lowest Q2 cancellation rate at 12.4%. Net sales orders in the Arizona homebuilder's U.S. operations rose year over year by 33% to 1,403 units. 

In comparison, net sales orders for Lennar appear to be decelerating. In its fiscal 2013 third quarter, its orders totaled 4,785 homes for a 14% gain, which compares with advances of 27% and 34% during the second and first quarters, respectively. 

KB Home seems even harder-hit by the mortgage rate hike debacle. In its most recent quarter, this Los Angeles, CA-builder saw its sales orders drop 8.6%. 

Stepping on the gas in Texas
Taylor Morrison's focus on move-up buyers dovetails with its stepped-up activity in high growth U.S. markets. Cases in point are its Texas territories. The steadily rising fortunes of Texas' petroleum industry provide the multiplier effects that can provide long-term tailwinds for Taylor Morrison.

Among the metro areas where the company is actively building are Austin and Houston, which showed 2011-2012 GDP gains of 6.5% and 5.3%, respectively,compared with the 2.2% clip at the national level.

Spurred by Texas' oil-fueled economy, home market demand in these two areas is also accelerating. Months of home inventory as of August stood only at about 2.5 months in Houston and 1.5 months in Austin. These inventory levels compare with the 6-month supply characteristic of a balanced residential property market. 

Ready to meet rising demand
Taylor Morrison has positioned itself well to serve this rising local home demand. Its spades are ready for about a dozen new communities in Houston. The homebuilder is also set to break ground on a pair of new residential projects in Austin.

Furthermore, the company remains in pursuit of land assets in prime real estate locations. Purchase of an additional 573 acres in the Riverstone community in Fortbend, TX, is one such move toward strengthening Taylor Morrison's real estate pipeline.

Taylor Morrison is likewise active in other markets like California, which is also leading the way in the U.S. housing recovery. Last month, it opened a new subdivision in Irvine, bringing the company's homebuilding operations to 24 communities in the state which also has better GDP growth than the national rate.

Final thoughts
The current troughs in prices of homebuilders present windows of opportunity to acquire or increase a stake in Taylor Morrison. Its share prices are now some 6% below its $22 IPO price in April, after hitting a high of $27.67 in June.

The home market on a national level may look spotty, but in Taylor Morrison's local territories, the situation looks brighter, and appreciable growth going forward can be expected. Further, its focus on the move-up home market should serve the company in good stead as the economic recovery gains more traction in the years ahead, and more homeowners seek to upgrade their residences.

More stocks for the recovery
With the American markets reaching new highs, investors and pundits alike are skeptical about future growth. They shouldn't be. Many global regions are still stuck in neutral, and their resurgence could result in windfall profits for select companies. A recent Motley Fool report, "3 Strong Buys for a Global Economic Recovery," outlines three companies that could take off when the global economy gains steam. Click here to read the full report!


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