Homebuilder Stocks Surge Despite Lagging Sales

Monday, 13 Aug 2012 08:01 AM

 

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U.S. homebuilder shares are appreciating at a record rate this year, reflecting confidence the housing rebound from a six-year slump can accelerate with new-home sales still 50 percent below the 40-year average.

The Standard & Poor’s Supercomposite Homebuilder Index of 11 companies has climbed 53 percent this year through Aug. 10, compared with a 12 percent gain for the broader S&P 500 Index. Builders, including PulteGroup Inc. and D.R. Horton Inc., are raising prices in markets with limited inventory and targeting move-up buyers with more money for down payments and better access to credit than first-time purchasers.

“We’re getting more activity, more traffic and even pricing has begun to improve,” said Jason Benowitz, portfolio manager for Roosevelt Investments in New York, which holds an almost 2 percent stake in Lennar Corp. “If the economy can muddle along, then we think housing will continue to be a bright spot. And the homebuilder stocks have room to run from here.”

homebuilder200gtty.jpg
Homebuilders in file photo
(AP Photo)

Shares rallied as new homes sold at a seasonally adjusted annual rate of 350,000 in June, about half the 40-year average, according to Commerce Department data. That’s still an improvement over 304,000 in June 2011 -- enough to help engender a big rebound for homebuilders, which underperformed the S&P 500 from 2005 through 2011.

PulteGroup has jumped 98 percent this year, Lennar is up 59 percent, Toll Brothers Inc. rose 49 percent and D.R. Horton has increased 43 percent.

87-Percent Decline

The annual equivalent returns for the S&P homebuilding index so far in 2012 would be more than 100 percent -- the best for any year in data going back to 1995. The index lost 87 percent from a peak in 2005 to its low in November 2008.

“Sales are a long way from where they were, even if you take out the bubble and look at more normal housing cycles,” said Doug Duncan, chief economist at Washington-based Fannie Mae. “While we’re still below a level you would expect to see, we’re on the right direction.”

Single-family construction currently accounts for just a fraction of the 0.22 percentage point that housing adds to gross domestic product. Still, it influences a large basket of other businesses with broad impact on economic growth, including Lowe’s Cos. and other home-furnishings retailers, and building suppliers such as Owens Corning Inc.

USG Corp., which manufactures gypsum wallboard, and Fortune Brands Home & Security Inc., maker of kitchen cabinetry, plumbing products, doors and windows, already are getting a boost from all the building, said Bob Wetenhall, a homebuilder analyst for RBC Capital Markets in New York.

50-Year Low

Single-family starts hit a 50-year high of 1.8 million in January 2006 as home prices rose, then sank to a 50-year low by March 2009. After unsteady growth since then, starts have risen in four consecutive months for the first time since 2010.

“For the building-product guys, it’s tremendous,” Wetenhall said. “There’s a lot of fixed costs, and if you get volume, you absorb costs over a large number of units.”

Fortune Brands’ sales jumped 5 percent to $935 million in the second quarter compared with a year earlier on the strength of new-home construction, the Deerfield, Illinois-based company said July 26.

Residential building also benefits rail and trucking companies, contributes to federal and local tax coffers and boosts spending by buyers eager to furnish, decorate and equip their new home. Consumers spend between $6,000 and $8,000 on such products when they buy a house, according to the National Association of Home Builders.

Pent-Up Demand

“We’re going back to tradition with the pent-up demand that you typically would get with the recession,” said David Crowe, chief economist of the Washington-based homebuilders association. “Housing is often the spark in a recovery. We see the potential for it igniting momentum.”

For half a century, housing was the tonic that helped restore the ailing economy after slumps. Apartments and new and existing homes added 0.26 percentage point on average to the quarterly growth rate during all expansions since World War II, according to a Fannie Mae analysis. Single-family construction accounted for more than half the contribution before the 18- month recession that ended in June 2009. Now new homes represent about a third.

“It’s been a very unusual recovery in that housing has not participated at all,” said Mike Thaman, president and chief executive officer of Owens Corning, based in Toledo, Ohio. It’s now “starting to become a part of the economy and maybe some economic growth.”

Rebound Test

The rebound still is being tested by weak job gains, a backlog of foreclosures and tight mortgage lending. The rate of new-home sales slowed in June by more than 8 percent from the previous month, the largest decline since February 2011.

Unemployment remained above 8 percent in July for the 42nd consecutive month, and mortgage delinquencies climbed for the first time in a year in the second quarter. While foreclosures are declining, there were 53 percent more filings in 2011 than 2006. Lenders are requiring the highest credit scores in at least a decade to approve home loans.

“I’m concerned that while there can be growth, the pace isn’t going to be as sharp as some people expect, given the job environment and the difficult mortgage qualifying,” said Adam Rudiger, an analyst with Wells Fargo & Co. in San Francisco.

Homebuilders are looking past all this to prepare for a boom in demand. The 6.6-month supply of existing homes listed for sale in June -- down from 9.1 months a year earlier -- is driving buyers to new construction.

Aging Stock

Between 1.7 million and 1.8 million new houses are needed a year to accommodate population growth and replace aging stock; last year brought fewer than 700,000 single-family groundbreakings. Inventories are back to 2006 levels, according to the National Association of Realtors.

While interest rates are near record lows and rental vacancies hit a 10-year trough of 8.6 percent in June, homebuilders are benefiting most from the low level of inventory, PulteGroup Chief Executive Officer Richard Dugas said in a July 26 earnings call.

Demand in the last quarter exceeded the Bloomfield Hills, Michigan-based company’s expectations, “a dramatic change from just a year ago,” Dugas said. “Consumers do not have a lot of choices, as many of the newer existing homes are often in the wrong location, while older homes are not always in great condition.”

‘Meaningful Weakness’

Even so, “many of the macro drivers of demand really haven’t changed all that much,” he said. The most recent consumer sentiment numbers “showed meaningful weakness, with most of the overall decline being in how consumers viewed future prospects for the national economy,” and there are “growing concerns over singular events ranging from a European meltdown to fiscal cliffs” -- which include the expiration of tax cuts at year-end.

One bright spot is a rebound in some of the hardest-hit housing markets, including Las Vegas, where a diminished inventory of homes for sale helped boost starts by 62 percent in the second quarter from a year earlier, said Greg Gross, director of the Nevada region for Metrostudy, a Houston-based firm that tracks construction.

Seeing more buyers going after fewer homes, Roosevelt Investments said in March that it increased its position in Miami-based Lennar by more than 422,000 shares and D.R. Horton, in Fort Worth, Texas, by almost 740,000 shares, to about 1.5 percent.

Buyer Pool

And the pool of buyers will increase as homeowners who lost properties through foreclosure a few years ago rebuild their credit and return to the market, Benowitz said. “The whole thesis behind this is new-home construction is at record low levels and is turning.”

With more demand and less supply, the median price of an existing single-family home in the second quarter rose 7.3 percent from a year earlier to $181,500. The gain was the strongest annual increase since early 2006, according to the National Association of Realtors.

Standard Pacific Corp., based in Irvine, California, has raised prices in more than 70 communities and cut incentives to the lowest in more than three years, and buyers continue to come, Chief Financial Officer Jeffrey McCall said on a July 27 earnings call.

“Our traffic levels are still up,” McCall said. “That’s our best forward indicator.”

© Copyright 2014 Bloomberg News. All rights reserved.

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