Homebuilders Looking at Spring Sales Through Rose-colored Glasses (DHI, LEN, KBH, XHB)

Spring is traditionally the best season for new home builders. In 12 of the past 14 years, sales of new homes peaked in March or April. If 2011 is going to live up to some rosy expectations, then sales need to pick up dramatically. And, all optimism aside, that’s not going to be easy.

The chief economist for the National Association of Home Builders expects new home sales to rise by 20% in 2011, to 385,000, according to an article in Bloomberg Businessweek. Fannie Mae and the Mortgage Bankers Association also see a rise in sales although by smaller amounts. Fannie Mae projects an 18% rise and the MBA estimates a 10% rise.

The CEO of D.R. Horton Inc. (NYSE: DHI) says he is “anticipating a much better spring selling season” this year than his company had last year. Horton, and builders Lennar Corp. (NYSE: LEN), KB Home (NYSE: KBH), and others have been cutting expenses to maintain profits, hoping for the turnaround Horton is hoping for in the next few months.

The higher expectations appear to be based on encouraging reports on employment growth and the availability of homes at substantially lower prices. The forecast that the US economy could grow by as much as 4% in 2011 also factors into the rosy predictions.

But there are some serious headwinds. New home sales in November fell to the lowest figure in 47 years, just 20,000 sales. That puts the homebuilders in a hole to begin with.

Borrowing costs are also rising, with 30-year fixed-rate mortgages now averaging 4.81%, compared with 4.21% in October, the lowest rate in 20 years. More people are applying for loans, but this number also starts from a hole.

There has been no tax incentive for buyers in place since last April, and that cast a chill on the market that hasn’t fully lifted yet.

Finally, the inventory of existing homes for sale is very large, and the number of foreclosed properties coming on the market is weighing on prices. Buyers are being drawn to the rock-bottom prices on foreclosed homes, not to new homes.

To lure buyers away from existing and foreclosed homes, homebuilders are going to need some serious help from the total US economy. New job creation is probably chief among these, but even if this should take off, is it likely that someone who just got a job after months of unemployment is going to be shopping for a home?

Then there’s wage compression to deal with. Most people who have been out of work for several months take a substantial pay cut if they accept a job in a field different from the one in which they were previously employed. And even if a person can find a job in his or her previous field, the offered salary is usually no better than flat with previous earnings.

After the huge fall in property values, renting for a while longer is another option. When home prices did nothing but go up, it made sense to suffer a little in order to acquire an asset that grew in value. But the collapse in housing prices has taught consumers the lesson that even even houses aren’t immune from financial calamity. And given that a home purchase is the largest acquisition the average person ever makes, would it not be more prudent to wait a bit to see how things shake out over the next year or two.

And it could take more than another year or two. Foreclosures are not expected to peak until March of 2012. Housing prices may need to drop another 20% to bring them into line with the slower US economy. As all this works itself out, sales of new homes will come under more pressure, not less.

So far today, KB Home shares are up around 4%, while Horton and Lennar are up about 2%. The SPDR Homebuilders ETF is also up about 1.5%.

Paul Ausick