March was a particularly rough month for the nation's homebuilders. Some of the top players suffered big market drops following another round of disappointing sales figures, and there are more headwinds for builders down the line that could keep the nation's housing recovery dragging along.
Though the housing recovery got a big boost in early 2013, the start of this year has not been so kind. Though January data showed relatively stable sales rates for new homes compared to the prior quarter's activity, the next month saw the market's appetite for new sales drop 3.3%. February represented the slowest month for new home sales in 18 months.
The effect has hit the nation's biggest builders hard, with Pulte Group (NYSE:PHM), D.R. Horton (NYSE:DHI), and Toll Brothers (NYSE:TOL) all falling by 5.6% or more last month, though only Pulte Group has recorded a loss for the first three months combined.
With the spring sales season officially starting, there may be some good news ahead for builders as buyers who waited for better weather start to close on deals. But there are some industrywide challenges coming that could dampen any builder's confidence.
1. Costly work
Following the massive downturn in construction during and following the financial crisis, demand for construction supplies tanked -- resulting in price reductions. But now that construction has picked back up, builders can expect to see higher prices, especially for lumber and steel.
In 2009, demand for steel dropped worldwide, resulting in a huge, 25% price drop. Though the steel market has had a few strong years, it still hasn't gotten back to the pre-recession pricing. However, according to IBISWorld, steel prices should increase at an annualized rate of 2.2% for the next three years. High demand from newly revived construction and real estate markets is putting upward pressure on the pricing.
Likewise, higher construction demand and increased prices for other construction components has pushed lumber prices up. With the overall cost of construction following a rising trend, the profits of most big builders will begin to feel pressure.
2. Strict behavior
One of the key demographics for the housing industry is the first-time homebuyer. With new buyers flooding the market in early 2013, the construction industry was keen to begin producing more homes. But there is one group that may be hindering the chances of many buyers set on buying -- lenders.
Though the nation's banks have begun to loosen some of their borrowing standards for mortgages, it's still not easy to obtain a mortgage these days. While some large banks have lowered FICO score requirements for FHA loans, and loosened loan-to-value restrictions for select loans, the effects of these changes will not be widespread.
Both Lennar and Pulte Group have indicated that the higher-value homes segment may be the best focus for now, as wealthier clients have a better chance of getting loans. For first-time buyers, the difficulties of being approved may hinder the entry-level market.
3. Commitment issues
Since the labor market is still experiencing some instability, and the overall economic recovery has been slow, many people just aren't ready to make the large commitment that a home purchase requires.
Friday's jobs report didn't provide any help, as the unemployment rate stayed flat at 6.7%. Much of the decline in unemployment figures that we've seen over the past few months is largely due to a drop in the participation rate, rather than significant job growth. With 20 million Americans over the age of 25 working only part time, there is a lot of proof that job seekers and underemployed people are still not getting the jobs they need.
More room to grow
Construction companies are still optimistic about the coming months, with confidence levels remaining high, according to the Associated Builders and Contractors' Construction Confidence Index. But while still facing significant headwinds, the nation's homebuilders may find their optimism is tested as we move forward through 2014.
Jessica Alling has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Wells Fargo. 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.