In the tentative housing recovery, homebuilders are drawing more customers to model homes and, even better, inking contracts.
For many builders the spring buying season was their strongest since the federal homebuying tax credit ended in April 2010. The Building-Residential/Commercial group — ranked No. 3 of 197 industry groups IBD tracks — is up 17% this year, factoring in Thursday's 11% drop.
Builder stocks had been rising for weeks. This week several gave back gains as NVR (NVR) missed analysts' revenue target for the quarter amid order cancellations, and as June housing data came in mixed.
No Place For Newbies Move-up buyers, many after bigger homes, lead the interest in new homes, spurred by record-low mortgage interest rates, an easier time selling their old homes and less trepidation on where housing's headed.
First-time buyers are largely absent from the ranks of lookers and buyers. They don't typically have what it takes to get a new home: cash for a 20% down payment plus income and credit scores high enough to qualify for a mortgage.
"It's still an extreme hurdle for first-time buyers to overcome" despite record-low interest rates, said Stephen Melman, director of economic services at the National Association of Home Builders.
Even if they do qualify, a low appraisal could kill the deal. A buyer would need to come up with a bigger down payment. A third of builders the NAHB surveyed earlier this year said a low appraisal canceled at least one sale of a new home.
The largest builders are Lennar (LEN), D.R. Horton (DHI), Toll Brothers (TOL), PulteGroup (PHM) and NVR. The highest rated are Standard Pacific Corp. (SPF), Lennar, Horton and Ryland Group (RYL). All but Horton fell Thursday as NVR dropped 14%.
Housing starts rose nearly 7% in June vs. May to their highest since October 2008, the Commerce Department said Wednesday. Single-family building permits edged up 0.6% as overall permits fell 3.7%.
The National Association of Realtors said Thursday that the existing-home sales rate fell 5.4% in June vs. May, as a tight supply of affordable homes limited first-time buyers.
Melman and other industry sources say today's new-home buyers are largely owners of existing homes trading up as rising prices nudge them from the sidelines into finally selling their current places.
They have decent paying jobs, good credit and growing families — the latter motivating them to look for larger places, Melman says.
Because of expanding households, Melman says builders have been constructing larger homes to "meet the demand." Citing Census Bureau data, he says the average floor area of a new house rose 3.7% in 2011 to 2,481 square feet, up from 2,392 square feet in 2010. Square footage had been dropping since its peak in 2007 at 2,521 square feet.
PulteGroup's move-up brand, Pulte Homes, saw closings rise 5% in the first quarter vs. a year ago — while closings fell 3% at its Centex unit that caters to first-timers.
"First-time buyers are challenged, absolutely," said Valerie Dolenga, a Pulte spokeswoman.
But Pulte's move-up homes in markets such as Phoenix and North Carolina have been hot sellers due to "pent-up demand" — and in Phoenix's case, shrinking supply as well, Dolenga says.
"There's fear that a home buyers are looking at today might not be there tomorrow," she said of the now supply-tight Phoenix market, still a foreclosure hot spot.
Other improved markets with lots of trade-up buyers are northern Virginia near Washington, D.C., and the Detroit suburbs, Dolenga says.
Detroit "has improved as the automotive industry has," she said.
Luxury and move-up builder Toll Brothers aims to expand in Michigan. It would fill a vacuum left by local builders knocked out of business in the downturn, CEO Douglas Yearley said in a Deutsche Bank investors' conference last month.
Toll needn't stress about cash-poor first-timers. It doesn't cater to them. Its buyers typically put 30% down "and are able to get mortgages if they choose," said Senior Vice President Frederick Cooper.
Yearley cited perking markets: Dallas and Houston ("we love it"), Arizona and Florida ("best spring in five years") and Seattle, which it recently entered ("so far so good").
He says Toll's luxury high-rises in New York City and nearby New Jersey are doing so well that the builder plans to bring other towers to Boston and the Washington, D.C., area.
Pulte and Toll point to Florida as a resurging market for "active adults" — buyers 55 and older getting second or retirement homes, tapping savings or using proceeds from the sale of their homes up north.
Upsizing And Downsizing While trade-up buyers with growing families gravitate to larger homes, older empty nesters may no longer need to live so large, Melman says. A smaller home needing less maintenance may appeal more.
Pulte consumer surveys show that its buyers all want some of the same things, like storage space. So it has been adding more closets. At Pulte Homes, garages are built to fit at least two cars — and plenty of stuff.
Builders also are starting to cater to multigeneration adult living. Melman says 19% of households now include more than one generation of adults, up from a low of 12% in 1980.
Lennar has launched "Next Gen, The Home Within A Home." The option, seen being available for 25% of its communities this year, lets new-home buyers add a suite with bedroom, eat-in kitchenette and living room that can be part of the living space or a private residence. It's aimed at baby boomers with parents or "boomerang kids" at home.
Toll also builds-in separate living areas, says its chief marketing officer, Kira Sterling.
These products don't grab first-timers, who Melman says account for less than 30% of new-home buyers vs. 45% back in April 2010, when the tax credit spurred purchases.