Homebuilder stocks seem to be defying gravity

February 11, 2007|By Jay Hancock | Jay Hancock,Sun Columnist

Is the end of the housing slump in sight?

History and a dozen major indicators say, "Heck, no." Homebuilder stocks say, "Yes."

The Russell 1000 Homebuilding Index is up 30 percent since its lows in July. Shares in builders such as NVR and D.R. Horton rose as much as 19 percent for the first five weeks of this year before falling back a little last week.

Sometimes the stock market makes uncanny and successful forecasts, as when it began bidding up energy stocks in late 2003, when oil was only $28 a barrel. And sometimes it rides off a cliff, as when it decided in late 2001 that the technology crash was over.

I think it's too early to put the homebuilding flop in the history books, but you wouldn't know it from looking at Wall Street.

Horton, the country's biggest homebuilder, earns "buy" recommendations from Goldman Sachs, AG Edwards, UBS and Citigroup. Even WCI Communities, whose Florida developments sit at the center of the homebuilding black hole, has seen its shares gain almost 50 percent since last summer, thanks in part to buying by mogul Carl C. Icahn.

True, none of these stocks is close to its 2005 highs. If 2005 was the attic and 2006 was the basement, today builders are sitting in the family room, waiting to see whether the TV is showing Touched by an Angel or Game Over.

Residential real estate just came off its worst year since 1989, which was in the middle of the savings and loan crisis. Sales of existing homes declined 8.4 percent, according to the National Association of Realtors. New-home sales fell 17.3 percent, says the Commerce Department.

Builders constructed hundreds of thousands more homes than buyers wanted last year and now must slash prices and throw in gazillions of upgrades to move them. The glut is made worse by speculators dumping properties on the market now that they realize homes have stopped appreciating.

More homeowners are having problems making mortgage payments. That won't hurt most builders directly, since banks and other lenders own the notes. But it means foreclosures could put even more houses up for sale and add to the downward pressure on prices.

More than 1 in 10 "subprime" loans made to riskier borrowers was in default in the third quarter, according to the Mortgage Bankers Association. Many analysts expect bad subprime loans to rise, as demonstrated by the announcement by HSBC Holdings last week that it had to set aside $1.8 billion more than analysts expected for soured mortgages and other loans.

On Thursday, luxury builder Toll Brothers disclosed it would write down the value of undeveloped land by tens of millions of dollars more than people expected.

Wall Street knows all this. But it expects the downturn, while severe, to be short. It figures builders will hold a fire sale this year, work off unsold homes, take a big profit hit and get back to business in 2008.

Optimists point to recent reports. At the end of the year the inventory of homes for sale had fallen to "only" a six-month supply, down from seven months last summer.

New-home sales rose 4.8 percent in December compared with the comparable month in 2005, the government reported. The National Association of Home Builders/Wells Fargo housing index, which tracks sales and buyer traffic, rose to a six-month high in January.

But indicators from the dead season of winter mean little. They mean even less when extraordinarily warm weather in much of the country puffed results. A year-over-year improvement in May or July might be something to cheer about, but we're not there yet.

Moreover, history shows that housing slumps don't cure themselves quickly. The 1989-1990 pain took as many as three years to abate, depending on the city.

Part of the appreciation in homebuilder stocks comes from anticipation of mergers in the fragmented industry. But nobody will be buying anybody soon. Builders have enough problems with their own backlogs; they don't want to acquire somebody else's headache, too.

The best thing to say about housing problems is that they haven't spread to other sectors. But while housing hasn't dragged the economy into recession, the economy isn't buoyant enough to quickly solve the homebuilders' problems, either.

jay.hancock@baltsun.com

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