Citi Dishes On Housing, Details 'The Good, The (Less) Bad And The (Not So) Ugly'

On February 11, Citi Research released a 15 page note updating the demand for new homes in the U.S. market.

Citi Research - Key Takeaways

The Good

Housing Starts: Citi expects to see a 10 percent increase over the 1.65 million starts in 2014. Going forward, Citi anticipates a CAGR of 10% through 2017 due to: "(1) an 0.8% CAGR in the US population, or an average addition of 2.6M individuals per year supporting job growth; (2) healthy levels of housing affordability; and (3) marginal easing in historically tight mortgage credit conditions."

Related Link: BofA On The Housing Market: 'Feelin' Alright'

The (Less) Bad

Builder Gross Margins: Citi on comments during the Q4 2014 earnings season: "builders continue to offer muted tones in regards 2015 gross margins due to rising (vintage) land costs relative to slower home price appreciation…"

The (Not So) Ugly

Lower Oil Prices May Lift US Housing Starts: a -50% reduction in oil prices should drive an incremental (cumulative net) +0.3M Housing Starts (i.e. +0.5M outside of TX, less -0.2M in TX).

Q4 2014 Builder Insights

Beazer Homes USA, Inc. (NYSE: BZH): "… our demand patterns improved during the course of the first quarter and then have continued into January. In Texas, particularly in Houston, we are watching jobs, inventory, home prices, incentives, and land prices extremely carefully."

D.R. Horton, Inc.(NYSE: DHI): "Our incentive levels are in the same range that we've seen really since last Spring. We saw our Texas operations perform in line with the company and our expectations for the first quarter and into the first few weeks of January so far."

KB Home (NYSE: KBH): "Unfortunately, we experienced the softening in demand in some of our served markets as the quarter progressed with increased pricing pressure while at the same time we continued to face cost pressure among other things. Interestingly, in Texas, our pricing is favorable right now. We're not seeing any price pressures in our Texas business."

Lennar Corporation (NYSE: LEN): "The headwinds remain a challenging mortgage approval process and aggressive competitor incentives." "… we're smart enough to know that as oil moves down, there may be some job loss, primarily more on the higher end. And it could impact pricing. And that's why we've given guidance to a little bit lower margin in the Houston market."

PulteGroup, Inc. (NYSE: PHM): "The Carolinas, Georgia, and Florida in particular were among our strongest markets." "… Texas was strong in the fourth quarter with demand improving as we moved through the period. We are certainly monitoring conditions to see what impact lower oil prices ultimately have on housing demand, but thus far in January, demand in Texas continues to be strong."

Ryland Group Inc (NYSE: RYL): "Sales incentive did increase slightly in the quarter, up 70 basis points from the fourth quarter of 2013 to 7%. Sales activity stayed relatively consistent through the quarter with 510 new orders in October, 543 in November, and 494 in December. Sales were up the most in the West and the Southeast, where we added significantly to capital in communities, and down 10% in Texas."

Image credit: Axel Hindemith, Wikimedia