Every single time I think we've seen the worst that the housing sector has to offer, new data comes out which signals that things are considerably worse than originally thought.
Yesterday, the U.S. Commerce Department released housing data for September which showed a surprising 15% surge in housing starts. This marked the fastest annual percentage increase in 17 months. The problem with this figure is that it's broad in nature. Digging a bit deeper led to a major disconnect between single-family and multi-family residences.
Single-family home construction, which is the bread-and-butter of the homebuilding industry, saw only a 1.7% rise in its annual pace, while multi-family construction skyrocketed 51.3%. This data leaves no other possible inference other than the fact that renters are ruling the roost. Future building permits for single-family residences were also forecast to drop in the near-term, offering even more proof that the demand for rentals is expected to rise and apartment REITs like AvalonBay Communities (NYSE: AVB), Equity Residential (NYSE: EQR), and UDR (NYSE: UDR) should reap the benefits of a new influx of renters into the marketplace.
Making matters worse, the Mortgage Brokers Association noted that mortgage applications plunged 14.9% last week despite interest rates hovering approximately 25 basis-points off their lows. It's a pretty scary scenario when new homebuyers and even those refinancing are so incredibly fickle that a 25 basis-point move higher from 60-year lows is enough to drop mortgage applications by almost 15%!
Earnings from JPMorgan Chase (NYSE: JPM) last week signaled a stark problem that most U.S. banks are encountering: rising foreclosure rates. While foreclosure rates remain significantly lower year over year, the third quarter marked the first time foreclosure rates rose in the past six quarters.
Even more concerning for banks and homebuilders than the 14% rise in initial default notices is the length of time these foreclosures are sitting on the market. According to RealtyTrac, it currently takes an average of 336 days for a U.S. home to go from receiving an initial default notice to being foreclosed by a lender, up from 318 days in the second quarter. Then, once these homes land on a lender's portfolio, they may take months or even years to move.
It's no surprise, then, that homebuilders which cater to the middle and upper end of the housing market are having the most trouble. KB Home (NYSE: KBH) and Hovnanian (NYSE: HOV) are two such names that have been posting losses of late -- and, based on this week's economic data, I don't think there's any hope for them in the near future. In the meantime, I'd suggest homebuilding optimists bury their heads in the sand. We'll ring the bell three times when it's all clear to come out.
Are you brave enough to buy a homebuilder here? Share your thoughts in the comments section below and which companies, if any, you've been watching.
