The year 2016 was an eventful one for home building.
Horton CEO Sees 2nd Bull-Market Effect on Home Building
Seeing signs that high consumer confidence, high job growth and increasing wages will spur continued strength in the home building industry next year, D.R. Horton chief executive Don Tomnitz, also thinks a softening stock market may actually help build...
Seeing signs that high consumer confidence, high job growth and increasing wages will spur continued strength in the home building industry next year, D.R. Horton chief executive Don Tomnitz, also thinks a softening stock market may actually help builders.
The evidence, he says, is anecdotal, coming from what he is hearing from Horton's divisional presidents as well as from sales people in the field. "Fiscally conservative, first-move up buyers," are taking gains from the stock market to purchase a home. According to Tomnitz, builders benefit twice from prolonged bull markets that inevitably soften -- once as the market rises and consumers begin to feel wealthier, and again when the market softens and investors leave for "safer havens" like real estate.
According to Tomnitz, over the past four or five years -- during the record run up in stocks -- builders have been the beneficiary of a well-documented "wealth effect," where flush-feeling consumers buy larger homes with more options. Now he thinks the second effect is just kicking in.
"I believe that the home building industry is the beneficiary of a softer stock market as long as it does not substantially adversely affect consumer confidence," Tomnitz explains. "As the market begins to decline, some people look for a safer haven for their money. The typical reaction is to take some profits off the table and a lot of times that translates to a new home."
As a company, D.R. Horton Inc. recently reported a backlog that represents 55% of the company's expected revenues for next year on top of higher gross margins of 18.5% percent during the most recent quarter. The outlook is so positive, that Tomnitz recently told CNBC that he thinks a 15% to 20% growth rate anticipated for the company over the next year is "too conservative."
Because this "safe haven" effect is undocumented, analysts like Bob Curran of Merrill Lynch and Tim Jones of Ryan Beck and Co.'s Southeast Research are less convinced that it is a real phenomenon that builders should consider in their plans for the coming year.
"I just don't have any information to suggest that that it is true or not," says Curran. Jones is more skeptical.
"I think [the health of today's housing market] is more a factor of home prices going up and generating more wealth," he says. "Obviously financing is more readily available, but in terms of a benefit from a falling market, I disagree. For every person that pulled money out, there was a person on the other side that got whacked."
Asked to point to the group of buyers where the "safe haven" effect will be most pronounced, Tomnitz says he sees first-move up buyers as the most likely source of added sales. Presently about 40% of Horton's sales are to this group.
"I can tell you from visiting sales people in the field that there are people doing exactly what I am talking about--contracting to buy a house subsequent to having sold some stock," he says. "Likewise, our move up buyers, I think, are the people that are more fiscally conservative and they also have more investments in the stock market than our entry level buyers."