Deja Vu for Housing

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To cite a phrase coined by Yogi Berra, it could be "deja vu all over again" for the housing industry. According to a recent article in American Banker, a housing bubble may be in the cards -- this time in the multi-family, rental market.

Said bubble may be driven by several familiar factors:  a surge in construction, albeit this time in multi-family homes amid declining inventories; the return of real estate investors who are attracted by lower financing rates and rising rents; and a paradigm shift resulting from the credit crisis that made would-be homeowners into renters, at least for a time.  

The recovery in the housing market has been surfacing in different ways depending on the region and the vantage point. In 2011, for instance, housing starts for multi-family units climbed more than 50% over the previous year, and 2012 was showing similarly robust results, based on Harvard data cited in American Banker.  

The article suggests that what lenders and home developers must not lose sight of is that the low rates that are driving lending activity today are a result of somewhat anemic economic conditions. There may be similarities, but lending standards have not returned to the relaxed state that they were in half-a-decade ago.

Homebuilder Activity

Toll Brothers (NYSE: TOL) recently reported a solid 4Q that may have company executives experiencing some deja vu from the good old days. Revenues increased 48% in the quarter versus last year's results to $632.8 million. Deliveries similarly climbed 48% to 1,088 units and unit backlog increased 54% versus the year-ago period.

RBC Capital Markets analyst Robert Wetenhall said in a CNBC interview he expects the stock has more room to climb. It is quite a bullish call for a stock that has already advanced more than 50% year-to-date. His call is in response to the company's forecast for consistently strong deliveries into fiscal year 2013 amid the robust backlog cited by Toll Brothers.

While the rock-bottom interest rates are helping to propel the housing recovery forward, low rates are not a key driver for Toll Brothers, Wetenhall points out. As a result, rising rates would theoretically not be damaging. That's because Toll Brothers targets the luxury homebuilder market, and much of its clientèle pay with cash. What could take some steam out of the stock and housing recovery is potential public policy that, while in an attempt to avert the fiscal cliff, could place a $10,000 tax burden on home-buyers in the real estate market.

The suppressed interest rates are compromising the earnings of lending institutions, such as Bank of America (NYSE: BAC). Nonetheless, Brian Moynihan, Bank of American's chief executive, recently applauded the U.S. Federal Reserve's efforts to keep the economy growing despite the low-rate environment, in a CNBC interview. He said that the "mortgage market is working well." In terms of mortgage originations, he noted that Bank of America grew them in the current quarter versus the previous quarter and that it is a trend that has been gaining traction for months.

As for Toll Brothers, in its 4Q earnings report the company spotlights a shift from conditions that emerged since 2007, a sea change that resulted in a slowdown in household formations despite a rising population. Declining household formations were exacerbated by a trend of families coming together under one roof to weather the financial crisis and young adults moving back home. Now, the signs indicate that household formation is beginning to normalize, which is expected to drive demand for homebuilding.

More to Come

Hovnanian Enterprises (NYSE: HOV) is scheduled to report its 4Q results on Dec. 13. The homebuilder's headquarters are in Red Bank, New Jersey, which is located in one of the hardest-hit counties in the state by Hurricane Sandy. The impact from the storm is clear, as it delayed up to 75 closings that would have occurred at about the time of the storm. Those closing dates have now been rescheduled and many will take place in 1Q 2013.

Nonetheless, Hovnanian is on track to either meet or surpass analyst expectations for 4Q revenues of $46.1 million, according to a company press release. The company's 4Q results will also reflect an $87 million charge related to a $797 million debt refinancing. The refi will ultimately lower Hovnanian's debt payments and extend maturities out to 2020. 

 Since the fallout from the first housing bubble, trouble that remains fresh in the memories of home-buyers, sellers, developers and bankers, it is hard to fathom that the U.S. housing market could be knocking on the door of another bubble. In the case of Toll Brothers, it is reassuring to see a developer keeping inventories under control.  Now if housing demand for multi-family units and single family homes can just be sustained.


GerelynT has no positions in the stocks mentioned above. The Motley Fool owns shares of Bank of America. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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