Housing Thoughts Ahead of the Potential Federal Shutdown
By Press Release Tuesday, October 01, 2013, 04:14 PM EDT
Assuming the Federal government shuts down tonight, we believe the most direct impact on homebuilders will be a temporary suspension of FHA-insured purchase mortgage originations. We anticipate housing demand will not be materially affected by the shutdown, but if this issue takes weeks rather than days to resolve, we may be forced to revisit this opinion.
• We Expect Originations of FHA-Insured Mortgages Will Be Temporarily Halted By a Shutdown, but We Anticipate Jumbo and Conforming Originations Will Not Be Affected. If the government shuts down at midnight EDT tonight, the most direct effect on our builders will be the interruption in FHA mortgage financing. We estimate the FHA accounts for roughly one-third of new purchase mortgage originations so depending on the length of the shutdown, builders and the overall housing market may feel a financial impact. However, we do not expect the temporary delays to result in mass cancellations.
• We Believe Entry-Level Builders Have the Most Business Risk in a Shutdown Scenario. Since the FHA primarily serves entry level buyers, we believe BZH, KBH, LEN, and DHI could have the highest business risk. Unless the shutdown turns into weeks rather than days, we do not expect a decrease in demand since the FHA stoppage should delay rather than cancel closings.
• We Believe September Quarterly Results Should Not Be Affected. We do not expect any impact on upcoming earnings for builders with a September fiscal quarter or fiscal year end. This group will report results from late October to early December. Tickers include DHI, BZH, NVR, MTH, MDC, PHM, RYL, and TMHC.
• Reiterate Buy Ratings on MTH & RYL. MTH and RYL remain our top picks in the space, and we would buy these names at current levels. Since RYL and MTH have a calendar fiscal year, we anticipate any demand delay related to a Federal shutdown will be picked up later in F4Q13. Also, at 90% move-up buyers for MTH and 70% for RYL, we believe these names have less exposure to FHA-financing issues than other names in our coverage which we view as a positive catalyst.
Important Disclosures regarding Price Target Risks, Valuation Methodology, Regulation Analyst Certification, Investment Banking, Ratings Definitions, and potential conflicts of interest may be found by clicking on the report link below