For the latest sign of a U.S. housing rebound, Toll Brothers Inc. Chief Executive Officer Douglas Yearley points to Hoboken, New Jersey: A couple torn between two condos last month at the sales office for its Hudson Tea complex decided to think about it over lunch. When they returned an hour later, both units were gone.
“People feel like now is the time to buy and they aren’t isolated to one building in Hoboken,” Yearley said in a May 23 conference call with analysts after the Horsham, Pennsylvania-based luxury homebuilder reported that quarterly orders for new homes surged 47 percent. “Confidence is up. The interest rates are there and they’ve been waiting so long to move on with their lives that they came out this spring.”
U.S. homebuilders are reporting their most-improved spring selling season in seven years as record low mortgage rates, job gains, and shrinking inventories are drawing buyers to sales offices that have been quiet since the property market collapse. After dragging the economy into recession, housing is set to “contribute modestly” to growth, according to Vincent Foley, a credit analyst for Barclays Plc in New York.
Purchases of new homes in April increased 3.3 percent from the previous month to an annual pace of 343,000, the Commerce Department said May 23. The largest publicly-traded homebuilders reported an average 25 percent increase in purchase contracts in the first quarter, the biggest jump since 2005, according to Barclays.
Off the Fence
While demand for existing homes has been on the rise in recent months, the improvement in new home sales signals that the growing appetite for residential real estate goes beyond foreclosures and other distressed sales targeted by investors. Traditional homebuyers, including those who have to sell another property to upgrade, are coming off the fence, Stan Humphries, Zillow Inc.’s chief economist said.
Mortgage rates for 30-year loans fell to 3.78 percent in the week ended yesterday, the lowest in Freddie Mac records dating back to 1971. The Federal Reserve has pledged to hold interest rates near zero through the end of 2014 and has bought home-loan bonds to lower borrowing costs.
Rates for 30-year jumbo mortgages fell to 4.38 percent yesterday from 5.11 percent a year ago, according to data from Bankrate.com.
In Hoboken, Toll Brothers increased prices six times since it began selling apartments last spring in the 157-unit 1450 Washington at Hudson Tea, where prices now range from $450,000 to $1 million, said Todd Dumaresq, marketing manager for Toll’s City Living division. The company has sold 108 units in the building and is now selling about 12 homes a month, he said.
Overlook Hudson River
The apartments overlook the Hudson River with views of Manhattan. The project has a fitness center and a rooftop terrace with an open-air fireplace and barbecue.
Jon Corzine, the former New Jersey governor and co-chairman of Goldman Sachs Group Inc., this month sold his penthouse apartment in Maxwell Place, also a Toll project in Hoboken, for $2.8 million in cash. Corzine, who ran the now-bankrupt MF Global Holdings Ltd., bought the apartment in November 2008 for $3.26 million, according to property records. He sought $2.9 million when he put it on the market in January.
Rising apartment rents also are driving Americans who have good credit and enough money for a down payment back into the housing market. Effective rents, which take into account such landlord concessions as a free month, climbed almost 1 percent in the first quarter from the previous quarter, the largest jump since the last recession began, according to REIS Inc.
“There are signs that this is a broader-based recovery,” Humphries said. “It is really driven by affordability and buyers feeling more confident about the housing market.”
Dennis and Sally Webert were renting when they decided to buy a home in PulteGroup Inc.’s Trailside at Huning Ranch development south of Albuquerque, New Mexico for $140,000, prompted by a special promotion. “We’ve been eyeballing these homes for several years,” Dennis Webert said. “The timing was just right.”
About 5,000 potential buyers showed up for the opening of nine model homes last weekend at The Bridges, a community in Delray Beach, Florida built by GL Homes, said sales agent Robert Macias, 54. The company used eight golf carts to shuttle customers from their cars and sold 18 homes over the weekend and another handful this week, he said.
The company, which sells homes in the community for about $500,000 to $1.5 million, has raised prices about 5 percent since preconstruction sales began in February, East Coast Division President Marcie DePlaza said.
50 In a Room
“There were times when you’d walk into one of the models and there would be 50 people in a room,” Macias said. “This is not like the boom because they were buying here because they want to live here, not because they want to make an investment.”
Homebuilders that stalled production during the crash are beginning to ramp up, said Metrostudy Chief Economist Brad Hunter. Housing starts in the first quarter jumped 20 percent from a year earlier, according to the Houston-based firm, which tracks new construction in 84 metropolitan areas. In Phoenix, starts jumped 58 percent and increased 30 percent in Northern California, he said. Inventory of finished new homes was down 13.4 percent from a year earlier and the supply at the current pace was 2.7 months, Hunter said.
“Twenty percent is a huge percentage increase but we are coming off a very low level,” Hunter said. “It’s occurring because builders finally got rid of their inventory, and demand is starting to pick up.”
Homebuyers are choosing to pay a premium for a new home because foreclosures often require repair, and short sales, where the property is sold for less than the amount owed, can take too long to complete, Hunter said.
The jump in demand is encouraging, though the recovery in housing is fragile and faces economic headwinds, including Europe’s sovereign debt crisis and possible U.S. government budget cuts next year. While unemployment has dropped to 8.1 percent from 10 percent in October 2009, it’s still above the 10-year average of 6.6 percent.
The pace of new home sales last month was less than half the average of the past 10 years, according to Commerce Department data. While property prices fell 3.5 percent in February, the smallest 12-month drop since February 2011, it extended the decline since the 2006 peak to 35 percent.
Home sales are also limited by tight lending standards, as lenders require higher down payments and credit scores.
‘Sure Feels Good’
Toll Brothers has the advantage of selling to wealthier buyers with better access to cash and debt. Potential acquirers also have better access to jumbo mortgages, including an “18-month lock option, which we haven’t had since Moby Dick was a guppy,” Donald Salmon, who runs Toll Brothers’ mortgage company said during the May 23 conference call.
“While domestic and global headline risk remains a concern that could potentially undermine buyer confidence, with mortgage rates at historic lows and inventory supplies dropping in many markets, we are feeling better than we have at any time in the past five years,” Robert Toll, executive chairman of the builder, said during the call. “We would like to say we’re back, but we need a little more confirmation. Nonetheless, it sure feels good compared to the desert we’ve just crossed.”
Publicly-traded homebuilders are taking market share from private firms because they have better access to financing and are able to buy land and build in the best locations, said Foley of Barclays. Toll Brothers rose 0.9 percent to $28.20 at 4:15 p.m. in New York, the highest since June 2007. The company has gained 38 percent this year, compared with the 37 percent advance of the 11-member Standard & Poor’s 1500 Homebuilding index.
The top builders saw a 25 percent increase in orders in the first quarter, and first quarter level was the highest since 2008, Foley said. Orders declined in the first quarter of every other year since 2005 except for the first three months of 2010, which had a 5 percent increase because of a temporary federal government tax credit for homebuyers, Foley said.
Homebuilders are raising prices in the strongest markets and have been able to cut back on incentives, he said.
“There’s more light and less tunnel,” Foley said. “This is real demand that has come back into the market.”
Toll Brothers, which reported a second quarter profit of $16.9 million, or 10 cents a share that beat estimates, was one of a string of builders that reported order growth in the past month, including Bloomfield Hills, Michigan-based PulteGroup, the largest U.S. homebuilder by revenue and Fort Worth, Texas-based D.R. Horton Inc., the largest homebuilder by volume.
“This spring selling season beat almost everybody’s expectations,” said Michael Widner, an analyst with Stifel Nicolaus & Co. in Baltimore. “But this was a strong quarter in what is likely to be a bumpy and protracted recovery.”
Traffic is rising at PulteGroup’s developments in Arizona, said Graham Epperson, the vice president of sales in the company’s Arizona division.
Investors make up a small portion of buyers in Arizona, Epperson said. Even the investors that are making purchases are planning to hold on to the property for several years and rent them out, unlike the speculators during the housing boom who sought to quickly sell homes for a profit, he said.
Sales rose 42 percent this year through April compared with a year earlier at David Weekley Homes, a closely held Houston-based homebuilder, according to Chairman David Weekley, with demand for homes in Texas the strongest.
The company, which cut 1,000 jobs in the housing slump, has been hiring again, with 20 to 30 employees a month for the last three or four months, he said.
“We have no reason to expect that this sales increase won’t continue,” Weekley said. “We’re very encouraged.”