Bernanke's Pessimism on Housing Might Drag on Pulte, Toll Brothers

Fed Reserve Chairman Ben Bernanke spoke to homebuilders today in Orlando about the progress of the American housing market. In his speech, he repeated a familiar theme: the economy won't recover until the housing market does. This could spell trouble for developers Pulte Group PHM and Toll Brothers PHM, who have recently expanded operations in the hopes that a turnaround in the housing market is finally here. Bernanke also said that the market should respond to the foreclosure glut by converting many homes into rental properties. "With home prices falling and rents rising, it could make sense in some markets to turn some of the foreclosed homes into rental properties," he said at the National Association of Homebuilders International Builders Show in Orlando, Florida. Fannie Mae is trying to offload hundreds of foreclosed properties in that same city, also home to Disneyworld. Some are listed for less than $30,000. Recently, Ben Bernanke testified before the House of Representatives that the American economy was far from recovery, because stalled purchasing power amongst American consumers was holding the housing sector back. "Uncertain job prospects, along with tight mortgage credit conditions, continue to hold back the demand for housing," he said. "Although low interest rates on conventional mortgages and the drop in home prices in recent years have greatly improved the affordability of housing, both residential sales and construction remain depressed." Since mortgage rates are staying at record lows, many may consider buying a house in one of the many markets where it is cheaper to buy than rent. The most recent MBA Mortgage Application survey suggests that mortgages are up, with more priviate individuals buying houses relative to investors. The survey also noted that second home purchases were up slightly. However, the biggest jump in activity was in refinancing, which is not good news for homebuilders. With five million homes lost to foreclosure in the past six years and property values plummeting in almost every market in America, the relationship between consumers and real estate has changed. Buying a house is no longer a guaranteed investment in the future. This is a disruption to a belief in homeownership that has endured for generations, and it will take Americans a long time to adjust to the fact that property, like any other commodity, will not always go up. Bernanke does not seem bullish on property in the near term. In his speech, he noted that "the housing sector continues to suffer from serious imbalances--a marked excess supply for owner-occupied housing accompanied by a stronger rental market." Such an imbalance puts the role of home builders into question. Recently, Toll Brothers benefited from a jump in construction spending, with an annualized rate of 470,000 single-family houses being built in December--more than any month since April 2010. Homes were also getting bigger, with a record-high 42 percent of new homes having four or more bedrooms in 2011. The record high number of larger homes and historically high unemployment rate suggest that luxury homes are becoming a bigger part of the segment because people who can afford those homes have not been hit as hard as others by the struggling economy. This means that Toll Brothers, who specializes in luxury homes in several upscale markets, may benefit from the shift in consumer demand more than Pulte, who serve a more economically diverse customer base. It will be difficult for Pulte to sell homes if unemployment doesn't go down, wages don't go up, and credit doesn't flow more quickly. Bernanke echoed these worries in his speech, noting that "unemploymend has remained high by historical standards" while a "a resurgent housing sector … has not played out this time." The speech comes just one day after major American banks agreed on a settlement with government officials. New York and California had held out until the wire, but finally were mollified by the $26 billion mortgage settlement. The agreement will see many hard-hit homeowners get $2,000. Nevada, one of the states worst hit by the subprime crisis currently flooded with empty homes, is looking at getting maybe $1.5 billion from the deal. Such compensation is a step towards healing, but critics say it is not enough. While the agreement may begin to restore confidence in the banking sector, it is still going to take time for market confidence to boost home sales. Still, home builders will be in a position to benefit once renters become buyers, a move that many Americans want to make. According to a recent survey, 78 percent of voters said that owning a home was "one of the most important things in their lives," according to a recent poll. Almost as many (74 percent) said that they felt owning a home was worthwhile despite the tumultuous housing market.