VIPs
- The California Association of Realtors’ (CAR) concerns about affordability is escalating; the median California home price is $530,000 sidelining prospective buyers despite state’s 10-year low in unemployment and the strongest wage gains in nearly a decade
- Beazer Homes’ stock price has been declining even as it beat top-line estimates and benefitted from lower lumber prices in its latest quarter; however, charges related to current market conditions in California have accelerated its stock decline prompting the homebuilder to cut prices to lower inventory and sell assets to reduce its exposure to California
- Mortgage company employee hours worked through March dropped 3.7%, the steepest decline in five years; March marked the fifth consecutive month of year-over-year contraction, flagging weakening housing demand
- A potential bright spot in housing demand is mortgage purchase applications which rose 5.1% over last year’s level in the first week of May after April’s 5.7% annualized pace; home purchase applications can, however, mislead as double counting arises when buyers apply through multiple brokers
- While there could be a viable explanation to vindicate the disparity between employee hours worked and purchase applications, homebuilding investors are not taking any chances and selling despite evidence that housing market conditions could improve
They were quainter, simpler times. The Cleavers personified mid-20th century suburbia. Leave It to Beaver was a campy late-1950s black-and-white American television sitcom with an all-knowing father (Ward), happy-homemaker mother (June), wise older brother (Wally), and goofy, kindhearted younger brother (Theodore “The Beaver”). The principal setting was the Cleaver home. The happy family resided in two homes over the series’ run, 485 Mapleton Drive and 211 Pine Street, both in Los Angeles, California. The Mapleton Drive house, located at Republic Studios, was surrounded by the proverbial white picket fence, had the living space on the first floor and sleeping quarters on the second. The Pine Street house, situated at Universal Studios Hollywood, was similar sans the fence. It can still be seen at Universal.
Beaver: Gee whiz, Wally, was our show really all about the 1950s California housing market?
Fast forward 60 years. Things are not as quaint or simple in California. “The housing crisis gripping the Golden State threatens to permanently stymie economic growth and demands bold and innovative solutions,” California Association of Realtors’ (CAR) President Jared Martin wrote in an opinion piece for CALmatters, a California-based nonpartisan, nonprofit journalism site.
CAR noted that the state’s unemployment rate is at a 10-year low while wages accelerate at their fastest pace in nearly a decade. Be that as it may, prospective home buyers continue to experience sticker shock, with medianprices still hovering in the $530,000 range. The affordability crisis must be addressed and fast if California is to remain a place where middle class people can aspire to a home a la Cleavers.
Enter Beazer Homes, a national homebuilder with a sizable California footprint and operations in other states in the West, Southwest, Midwest and Southeast. Beazer posted a strong quarter as revenues surpassed expectations across nearly every operational metric. The company benefited from lower mortgage rates that contributed to improved affordability and a more favorable demand environment. However, Beazer earnings missed estimates, and they had a lot to say about California in its May 2nd second-quarter report (bolding ours):
“During the quarter, we also took impairments on several of our California assets. In response to recent changes in market conditions, we concluded that it had become necessary to reduce prices in some of our active communities, all of which were previously classified as land held for future development. Additionally, after a thorough review of our California assets, we made a strategic decision to sell or activate all of the remaining assets which were still classified as land held for future development. Although these decisions led to an impairment this quarter, our actions will enable us to increase our sales pace, generate cash more quicklyand redeploy this capital to more attractive investments.”
Four things jump out: 1) price cuts; 2) sell assets; 3) raise cash; 4) invest somewhere else. Beazer (ticker BZH) is playing defense in California. Its product isn’t turning over fast enough. So Beazer is increasing discounts to reduce inventory. Investors are running for the hills. The stock price has lost about a quarter of its value in the last four trading days. And, as illustrated above, BZH has already been tracking the year-over-year declines in lumber prices. That’s in part a reflection of builders reducing supply and paring plans to build more.
Weaker housing demand should also be reflected in less activity by mortgage brokers. Backing up this narrative, employees have been putting in fewer hours at real estate credit firms, otherwise known as mortgage companies. The 3.7% drop in hours worked through March was the largest in five years, and was also the fifth in a string of year-over-year declines(regular readers will know that’s called a “fact”).
But something doesn’t square. The Mortgage Bankers Association (MBA) told us yesterday that new home purchase applications are running 5.1% above year-ago levels in the first week of May after advancing in April at a 5.7% twelve-month pace. Purchase applications are about as real-time as it gets when it comes to gauging housing demand. They are early in the buying process.
That said, high-frequency data points such as the purchase index do have flaws. The series is notoriously noisy given the challenge in seasonally adjusting a weekly data set. Application volumes can also inflate demand as they’re prone to double counting when buyers apply for mortgages through multiple lenders.
In the mortgage application data’s favor, disruption has also invaded the mortgage space. Financial digitalization – think Quicken’s Rocket Mortgage– makes it possible to conduct more business with fewer hours worked. If that explains the difference between rising purchase apps and falling mortgage banker hours, then Wally won’t be annoying Mrs. Cleaver by describing the U.S. housing market as going “ape.” Stay tuned…